An alarm clock for fintechs and banking services

Observations of the Snark Fintech tank

The fintech world loves the disturbances glamor – there is quickly, break things, reinvent the system. Sometimes what is broken is not the system – it is confidence. This is what happened with Charlie Javice, the founder of the financial assistance startup Frank, the new poster for Fintech fraud after her conviction for having fraudd JPMorgan out of $ 175 million.

Javice, who sold her startup Fintech Frank in Jpmorgan Chase in 2021, said he had more than four million users. This number was more inflated than the cryptography market following the Trump elections. The real number? About 300,000 users.

To cover its traces, Javice would have hired a data scientist to make user data, by presenting them as proof during the acquisition process.

The conviction of Javice sends shock waves via fintech and banking – and the aftershocks are just beginning. The implications go beyond a bad actor in the system. This case exposes vulnerabilities in the way FinTech startups sell, how banks assess acquisitions and the way investors assess risks in the sector.

How was JPMorgan Chase fooled?

It was not only the case of a person who was really good in deception – it was a perfect storm of poorly aligned incentives, an inadequate reasonable diligence and a rush to remain competitive in the FinTech arms race.

Chase has not only bought a product – he bought a story. The land was irresistible: an increasing user base of 4.25 million generation zers that the bank hoped to transform into long -term customers. Atypical for an agreement of this magnitude, the reasonable diligence process of the bank:

1) User data verification failure. Chase has strongly supported Frank’s self-detached data without performing adequate third-party audits to validate the user base of the platform. According to the trial that JPMorgan brought after the acquisition, the bank discovered millions of false accounts only After Integrate Frank’s database into their system.

2) Raisable technical diligence precipitated. The Bank’s reasonable diligence process has focused more on the business model and growth potential than on Frank’s underlying technology. The verification of the authenticity of user data should have been an absolute priority, but the JPMorgan technical audit missed the brand.

3) Exaggerated on internal expertise. Large banks often have teams of mergers and internal acquisitions which show reasonable diligence, but in this case, JPMorgan underestimated the complexity of the evaluation of a fast growing finish. Although the team may have been able to analyze traditional banking acquisitions, Fintech acquisitions require different expertise, in particular in the verification of technological demands, data integrity and regulatory compliance.

The reasonable diligence of JPMorgan did not exceed the surface and carry out the type of forensic audit which would have exposed the fraudulent data of users before the conclusion of the agreement. Chase’s motivations, however, are understandable:

• Chase was desperate to attract the Zers generation. With Fintechs and Neobanks such as the Carillon, current and cash applications that have won younger customers, JPMorgan saw Frank as a shortcut to secure millions of generation Z.
• There was strong competitive pressure. Other megabanques such as Bank of America and Wells Fargo also looked at Fintech acquisitions to remain relevant. The pressure to move quickly to a competitive market often leads to the corners of reasonable diligence.
• The perceived risk was low. Compared to the more complex finches offering loan or payment solutions, a platform helping students filling the FAFSA forms probably looked like a low risk bet – which may have made it possible to run in a false feeling of security.

The impact of the Javice case on the reputation of Fintech

The biggest victim of the Charlie Javice affair is not the JPMorgan portfolio – is confidence in Fintech. For years, fintechs have sold themselves as the transparent and friendly alternative to traditional banks. But high -level scandals like this will make consumers – and banks – think twice.

There is an erroneous notion that permeates the Fintech community that fintechs are ethical, either because they claim to be, or because they do something (such as carbon compensation) that they assimilate ethical behavior.

There are affirmations that there is an “ethical” of Fintech which distinguishes fintech from banks (and makes the fintechs morally upper). These perspectives are not always explicit, but the references appear here and there:

• 9TO5 Mac reported: “The Americans paid $ 113 billion in credit card to banks last year, almost 50% more five years ago. ethics Null costs and transparent prices allows thinner beneficiary margins. »»
• An ethical consumer study said that “Monzo is one of the best current ethical accounts” and revealed that “the vast majority of companies in the personal finance sector are poorly scored on ethics.
• An article on Medium.com said: “The fintech is better than traditional financial companies because Challenger banks focus on securing their customers using technology.

Could the fintechs be Less Ethics than banks?

Fintech often claim to be more focused on technology than inherited banks (just like the average article). Therefore, could fintech startups be less ethics that inherited banks?

A study by Brett Scott, a senior innovation Lab finance scholarship, raises interesting ethical problems concerning the progressive use of technology in banking services. His study, entitled Hard Coding Ethics in Fintech, asked:

• Does automation reduce ethical consciousness and responsibility for financial professionals? According to Scott, “it is plausible that, as the decision-making processes are increasingly automated, (providers) may feel less and less responsible for decisions, or may not even be aware of decisions.”
• Does automation reduce the awareness of customers in ethics? Scott Conjectures: “Fintech companies put a positive turn on speed, ease and nature without friction of digital finance, but does the finance without friction detach more and more the client of the more in-depth consciousness of what is hidden?”
• Does automation lead to financial monitoring? Scott warns: “Digitization increases personal data trails. Financial data reveals very deep information on how people act in the world and, when combined with other data sets, allows institutions to know you better than yourself. ”

Since the general consensus is that fintechs do a better job to capture consumer data – and by “automation” more widely – Scott could have replaced “institutions” in this sentence with “fintechs”. Scott closed his study with the following comment:

“I have speculated on certain potentially negative ethical implications of Fintech. Unless we actively constitute awareness of (these questions) in our innovations, we can somenten in an increasingly essential financial system. ”

Without a more concerted attempt to define and demonstrate an ethical behavior, the romantization of the alleged moral superiority of Fintech will turn around.

While the adoption and use of fintech continues to increase, there will be an increasing number of examples and cases where fintechs will fail in ethics “knowledge when I see it”.

Even if the percentage of instance is lower among the finchys than the inherited financial institutions, it will not change perceptions. This is not a thing “three strikes until we consider you something contrary to ethics”.

Fintech can be of service by abandoning “ethical” rhetoric and by resolving consumer and customers’ problems.