Congress tries to blame banking apps for covid fraud

App-based financial services firms like PayPal and Square have revolutionized how American consumers and businesses move money around — and now they’re being blamed for covid-19 relief fraud.

Yes really. In a congressional report published last week, lawmakers on the subcommittee on the coronavirus crisis say widespread fraud in the Paycheck Protection Program (PPP), which was supposed to pay shuttered businesses to keep employees on the payroll during the pandemic, should fuel calls for new regulations on so-called “fintech » companies.

“While PPPs delivered important relief to millions of eligible small businesses, at least tens of billions of dollars in PPP funds were likely disbursed to ineligible or fraudulent applicants, often involving fintechs, causing enormous harm to taxpayers,” the report said . , in part.

It’s a bit like blaming a bank robbery on which company produced the getaway car.

And as for OPS, there were many robberies. Between a quarter and a third of the $835 billion distributed through the program is suspected to have been stolen by fraudsters, partly because of lax oversight of PPP loans and partly because, well, that’s what always happens when government starts to throw money around in a crisis.

Was any of the fraud facilitated by any fintech firms? Yep. As the congressional report describes, a couple of fintech companies – notably Womply and Blueacorn – were responsible for a larger proportion of shady transactions related to OPS loans. Both “failed to implement systems capable of consistently detecting and preventing fraudulent and otherwise ineligible PPP applications.”

Another fintech, Kabbage, which later filed for bankruptcy, “missed clear signs of fraud in a number of PPP applications,” according to the report.

Do you know who else failed to implement systems and missed clear signs of fraud in much the same way? Small Business Administration (SBA).

But, okay, maybe that’s beside the point. Let’s accept the congressional committee’s premise that some fintech firms were unwilling or unable to vet users in a way that made the PPP scam even worse than it would have been with only government incompetence in the equation. Calling out the bad actors in a government report may have some value for the rest of the industry or for consumers. Perhaps there could be law enforcement actions to track down the fraudsters who used these services, and perhaps the specific services themselves could be dragged into court if they failed to meet contractual obligations that came with being trusted to spread these PPP loans .

Of course, these are not the conclusions the committee reached.

“Based on these findings, Congress and the SBA should carefully consider whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be allowed to play a leading role in future federal lending programs,” the committee concludes.

In other words, an entire industry that has sprung up to compete with traditional financial institutions like banks should be banned from being involved in federal lending programs because a few members of that industry have engaged in bad behavior—behavior that was rampant in the same government which will now regulate them. Does this make any sense at all?

To carry the getaway car metaphor further, this would be like banning all cars from driving on public roads because Bonnie and Clyde drove a Ford. Of course, the horse-drawn carriage and bicycle manufacturers of the day might have loved that idea.

A similar thing can happen here. “The report will be cited to justify putting more roadblocks in front of the fintech industry and more protections for the old banking system, neither of which are warranted,” warns Nicholas Anthony, a policy analyst for the libertarian Cato Institute. That would not only be unfair to these businesses and their investors; that would be unfortunate for the millions of people who use these services for non-fraudulent activities.

Again, PPP fraud should be blamed almost entirely on the federal government’s own actions, which included removing safeguards designed to prevent fraud so that loans could be distributed as quickly as possible. The PPP program clearly overwhelmed any capacity the SBA might have had to review loans, as the agency was charged with distributing more than 20 times as much as it had handled in any whole year over just 33 days in March and April 2020. As the SBA’s inspector general pointed out in a report published in May, the agency did not have “a centralized entity to design, direct and manage fraud risk” until February 2022—nearly two years after OPS -the loans began to be distributed and long after the main part of them had been forgiven.

But, yes, the fintech industry is surely to blame.