Fintech’s fraud problems are unlikely to be an easy fix. Here’s why.

• Fintechs have made it easier and faster to bank, invest and make payments.
• But recent reports have questioned fintech’s role in facilitating fraud via that ease.
• Insider spoke to eight experts, analysts and VCs about fintech’s messy relationship with fraud.

A report by a short seller alleging fraud at Cash App, a personal finance app that is part of Jack Dorsey’s fintech giant Block, highlights concerns some have about the wider industry.

Block has strongly denied the allegations, and some experts question the validity of the report. Still, industry insiders worry that the speed and accessibility these digital-native companies offer may come with a dark side.

Much of the value fintech offers consumers is ease of use, especially when it comes to onboarding. Registering and getting approved for a fintech is often faster and easier than getting an account in a traditional bank.

A quick registration process can also help speed up growth, which is always an important factor for an early start-up. For many consumer-facing fintechs, the number of users has often translated into the company’s growth, and thus its value, several sources tell Insider.

But it’s a double-edged sword, as fraudsters and other bad actors can also get on board with ease, according to several analysts, venture capitalists, founders and fraud experts who spoke to Insider.

“With rapid growth comes rapid fraud,” Frank McKenna, a longtime fraud expert who works with banks, lenders and fintechs, told Insider. “A fintech may think they are coming from legitimate customers and be surprised by their rapid growth – but they may actually just be an incredibly easy target for fraud.”

In many ways, the fraud problems fintechs can relate to are the industry’s growing pains.

“If our general theory is that we as a society want everyone to use modern digital financial products, then Jack Dorsey, first through a merchant business and then through the Cash App, has figured out the way to do that, which is to have a low friction and say yes, and then follow up and weed out the bad apples,” Matt Harris, a partner and fintech investor at Bain Capital Ventures, told Insider.

Cash App’s onboarding process has been investigated

Block’s share price fell as much as 27% on Thursday after Hindenburg Research released a report accusing the company of facilitating fraud and enabling illegal activity on the Cash App. The report claims that Cash App’s lax onboarding requirements resulted in a proliferation of fake accounts.

Cash App only requires a zip code, debit card number and either an email or phone number to create an account. Meanwhile, other players in the area require a user’s date of birth and/or a public identifier such as a social security number.

Hindenburg’s report referred to Cash App’s compliance strategy as a “Wild West” approach and claimed that 40% to 75% of Cash App accounts were “fake, involved in fraud, or were additional accounts linked to a single individual.”

Block issued a public statement Thursday responding to the “inaccurate short seller report.”

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs and controls. We will not be distracted by typical short seller tactics,” the statement read in part.

Cash App’s alleged fraud problem may also be a result of its large, active customer base, numbering about 44 million, according to the company’s 2022 annual report. More customers means more fraud, said Jason Lee, founder of DailyPay and Salt Labs and former CEO at Goldman Sachs, to Insider.

“Bad people will find a way to do bad things regardless of what you ask them to do,” Lee said.

To be sure, Hindenburg has skin in the game as a short seller. It is to the company’s advantage if Block’s share price goes down.

Bain Capital Ventures’ Harris took issue with the report’s characterization of exchanges as “some Machiavellian scheme,” he said, despite it being a standard revenue stream in the industry.

“It felt very self-serving. It definitely made some good points, but it made some bad points and quite deliberately framed everything negatively,” he added. “So my net reaction is that there’s definitely something to be concerned about there, but it’s radically overblown.”

Another fintech analyst said much of the report was “open secrets.”

“I don’t think there’s an investor on the street who wasn’t aware that Cash App is relatively widely used for illegal activities,” the analyst told Insider. “At the end of the day, I don’t think anyone is shocked by any of it.”

Apps make payments easy – but too easy?

The fact that Cash App offers peer-to-peer payments exacerbates the fraud problem, according to McKenna, the chief fraud strategist at Point Predictive, an anti-fraud software company.

“It makes the money move so much faster,” he said.

P2P payment services allow users to send and receive money instantly via a mobile device. As a free, fast and convenient alternative to traditional bank transfers, P2P services have grown in popularity over the past decade.

Big banks have even gotten involved. The success of PayPal’s Venmo and Block’s Cash App led to the launch of Zelle in 2017 via Early Warning Signs, a bank-owned consortium.

However, everyone seems to have their own problems with fraud, whether it’s scammers posing as bankers to get customers to send money through Zelle, or bad actors using bots to create new accounts to take advantage of rewards and incentive programs, as was the case with PayPal. . Some of the apps have received scrutiny from regulators and DC

“They are targets of fraud in part for some of the same reasons we love them,” Ted Rossman, a senior industry analyst at Bankrate.com and CreditCards.com, said of P2P payment apps. “They’re instantaneous, it’s hard to reverse these transactions, they can be quite anonymous. It’s almost like is it a feature or a bug? The fraud part is a bug, but it’s kind of embedded in some of the features that we like ,” he added.

Revealing fintech’s dark underbelly

However, fraud is not only a problem among P2P services.

Digital bank Chime has had its own problems with fraud, Jason Mikula, a fintech analyst and consultant, told Insider. Neobank’s problems reportedly reached the point where some merchants, such as hotel and car rental companies, would not accept its credit or debit cards following a pattern of users withdrawing money from their accounts before pre-authorized payments could be settled.

Fintechs were also singled out for facilitating fraud in the Paycheck Protection Program, as an 18-month House Subcommittee investigation called fintechs for having little or no fraud prevention efforts in place to stop obvious and preventable fraud.

In fact, fintechs built their businesses on the fact that they could make banking easier, faster and more convenient – ​​and they have grown in popularity in recent years as aspects of life, from work to finances, have moved online. But concern is growing that ease of use has led to easier fraud.

When Mary Ann Miller saw the Hindenburg report estimate that roughly 40% to 75% of Cash App accounts were fake or involved fraud, she told Insider she wasn’t shocked at all. Miller is a 30-year-old fraud expert who has worked in and with banks, fintechs and neobanks.

Miller said fintechs largely have conflicting goals when it comes to balancing growth and risk management.

“One is to grow, grow, grow,” Miller said of fintech’s competing priorities. “And then you have the risk teams who probably don’t have the voice they need at the table.”