Wake-up calls for fintech and banking

Observation from the Fintex Nark Tank

The world of fintech loves to attract chaos. Move fast, break things and reinvent the system. Sometimes what breaks is not the system, it’s trust. That’s what happened with Charlie Javice, founder of Financial Aid Startup Frank, the child of the new poster of Fintech fraud, after her conviction for fraudulent JPMorgan Chase from $175 million.

Havis, who sold fintech startup Frank to JP Morgan Chase in 2021, claimed it had more than 4 million users. That number was bulging more than the crypto market had been in the aftermath of the Trump election. Real number? Approximately 300,000 users.

To cover her truck, Javice allegedly hired a data scientist to manufacture user data and presented it as evidence during the acquisition process.

Javice’s conviction is sending shockwaves through fintech and banking, and aftershocks have just begun. This meaning goes beyond bad actors who play the system. This case reveals vulnerabilities in how fintech startups sell themselves, how banks evaluate acquisitions, and how investors assess sector risk.

How was JPMorgan Chase due?

That wasn’t just an example of a person being really good at deception. It was a complete storm of poor facilities, inadequate due diligence and a rush to stay competitive in the fintech arms race.

Chase not only bought the product, but also bought the story. The pitch was attractive. Growth of the user base of Gen Zers of 4.25 million that banks wanted to turn into long-term customers. For transactions of this size, for bank due diligence processes:

1) Failed to check user data. Chase relied heavily on self-reported data from Frank without conducting appropriate third-party audits to validate the platform’s user base. According to a lawsuit filed after the acquisition by JPMorgan, the bank discovered millions of fake accounts only after integrating Frank’s database into the system.

2) Hurried technical due diligence. The bank’s due diligence process focused more on business models and growth potential than on Frank’s underlying technology. Checking the reliability of user data should be a top priority, but JPMorgan’s technical audit missed the mark.

3) Overreliance on internal expertise. Large banks often have internal M&A teams that perform due diligence, but in this case JPMorgan underestimated the complexity of evaluating fast-growing fintech. While the team may be skilled in traditional bank acquisition analytics, Fintech acquisitions require different expertise. In particular, it is to verify technical claims, data integrity and regulatory compliance.

JPMorgan’s due diligence failed to conduct forensic audits of the kind that had published fraudulent user data before the transaction was closed. But Chase’s motivation is understandable.

Chase was desperate to attract the generation of Zah. JpMorgan saw shortcuts and Franks for neobanks like FinTech, Tim and now cash apps to secure millions of Gen Z accounts. There was strong competitive pressure. Other megabanks, such as Bank of America and Wells Fargo, were also paying attention to the acquisition of FinTech to remain relevant. The pressure to move quickly in a competitive market often leads to cutting the corners of due diligence. The perceived risk was low. Compared to more complex fintechs offering lending or payment solutions, the platform that helps students complete their FAFSA forms probably feels like a low-risk bet.

The impact of the Havice incident on Fintech’s reputation

The biggest casualty in the Charlie Javice case is not JPMorgan’s wallet, but trust in Fintech. For years, FinTech sold itself as a transparent, customer-friendly alternative to traditional banks. However, such a high-profile scandal considers consumers and banks twice.

There is a false concept that permeates the fintech community that is ethical.

There is arguing that there is a “spirit” of fintech that distinguishes fintech from banks (and somehow makes it morally superior). These perspectives are not necessarily explicit, but references appear everywhere:

9to5 Mac said, “Americans paid nearly 50% of banks $113 billion in credit card interest last year over five years ago. So, adopting the new Fintech spirit of zero fees and transparent pricing will diminish profit margins.” An ethical consumer survey claimed that “Monzo is one of the best ethical current accounts,” and that “the majority of companies in the personal finance sector scored terrible ethics. A Medium.com article stated, “Because Fintech is better than traditional financial companies, Challenger Bank focuses on protecting client data. Traditional banks are particularly slow in the issue of adopting cybersecurity measures.”

Isn’t Fintech more ethical than banks?

Fintechs often claim to be more tech-driven than legacy banks (as in medium articles). So, wouldn’t fintech startups be more ethical than legacy banks?

A study by Brett Scott, a senior fellow at the Finance Innovation Lab, raises some interesting ethical questions about technology advancements in banking. His research put hard coding ethics into fintech and asked:

Does automation reduce the ethical awareness and responsibility of financial professionals? According to Scott, “It is plausible that as the decision-making process becomes more and more automated, (providers) may become less and less responsible for decisions, or perhaps not recognise decisions.” Does automation reduce customer perceptions of ethics? Scott said, “While Fintech companies have put a positive spin on the speed, ease and frictionless nature of digital finance, will frictionless finance become increasingly detached from the deeper perception of what customers are behind?” Will automation lead to financial surveillance? Scott said, “Digitization increases the trajectory of personal data. Financial data reveals very deep insight into how people behave in the world.

The general consensus is that Fintechs does a better job of capturing consumer data, and that “automation” allowed them to replace “institutions” in that sentence with “Fintechs” when they lined up more widely. Scott closed his research with the following comments:

“I have speculated about the potentially negative ethical implications of fintech. Unless we actively embed the perceptions of (these questions) into innovation, we are increasingly obsessed with the financial system that is ethically impaired.”

Without a more coordinated attempt to define and demonstrate ethical behavior, the romanticization of fintech’s moral superiority would backfire.

As Fintech adoption and use continues to increase, there will be more and more examples of Fintech failing ethics.

Perception remains the same even if the percentage of instances is lower than that of legacy financial institutions. Until we consider you unethical, it’s not a “three strike.”

Fintech can give themselves a favor by dropping the rhetoric of “ethics” and return to solving consumer and customer problems.