Does Fintech Have a Revenue Fraud Problem?
In the fast-paced world of Financial Technology (fintech), a shadow has cast itself over the usual narrative of innovation and growth: the rising concern with revenue fraud. From embellished financials to obscured liabilities, several incidents within the sector have initiated conversations about the integrity of Fintech startups’ revenue reporting.
Image: Unsplash
Fool Me Once: Recurrent Events
While there are many examples of revenue fraud in the world outside of Fintech, a majority of the recent examples fall into that sector. Below are four of the most recent and significant examples, beginning with the Wirecard Scandal in 2020, followed by Frank in April of this year, Solid in September, and Dash in October.
Wirecard
Wirecard, once a celebrated German fintech company, underwent a dramatic downfall thanks to fraudulent activities and accounting irregularities that went unnoticed or unaddressed by regulatory bodies and auditors for years. Suspicion over its accounting practices began in 2008, but Wirecard aggressively silenced its critics, launching attacks even against the press. EY, despite conducting audits, failed to verify Wirecard’s cash reserves, and it was not until KPMG's special audit that the extent of the financial discrepancies came to light. In 2021, a whistle-blower revealed extensive inside information, providing a grim look at years of fraudulent practices that precipitated the company's insolvency.
Financial Times, led by journalist Dan McCrum, unraveled the story one piece at a time. The lawsuits continue as of this day.
Needless to say, fintech startups are still living under the shadow of Wirecard’s collapse in Germany, and supervisory barriers increased as a result.
Frank
Frank, a financial aid startup, faces severe legal repercussions following the reported inflation of user data to secure their $175 million acquisition by JPMorgan Chase in 2021. Prosecutors have charged Frank CEO Charlie Javice with multiple counts of fraud, citing that she deceitfully augmented her user base numbers to 4.25 million, in stark contrast to a real user count below 300,000, to mislead the banking giant during the acquisition talks. Post-acquisition, Javice had transitioned to a managing director role at JPMorgan Chase and was slated to gain upwards of $45 million from the deal. The bank uncovered the discrepancies, promptly shuttering Frank and initiating a lawsuit against Javice and Frank executive Olivier Amar.
Solid
Solid, a notable banking-as-a-service (BaaS) platform, is currently entangled in a complex web of allegations, primarily revolving around deceptive financial reporting to embellish its appeal to potential and existing investors. Amidst its Series B funding round in August 2022, Solid is accused of methodically inflating its revenue figures and ARR projections by recording revenue from uncontracted and unbilled clients, sometimes with no genuine ability or intention to remunerate. The company reportedly adopted an aggressive client acquisition approach, characterized by non-existent due diligence and the delivery of unrealistic promises to its clients, to exhibit stronger growth in customer and transaction volumes.
Dash
Dash, a once-promising Ghanaian fintech startup aimed at facilitating efficient cross-border payments by linking mobile money wallets across Africa, has closed following financial mismanagement and fraudulent activity claims. Despite reporting substantial growth and processing $1 billion in transactions, internal audits revealed a deliberate misrepresentation of user metrics by Dash CEO Prince Boakye Boampong, leading to his suspension and eventual firing. His successor, Kenneth Kinshua, discovered that there was a $25 million shortfall, currently unaccounted for.
Wirecard’s former Board Member Jan Marsalek’s whereabouts are still unclear. He kept his silence until he was reported to send an unsolicited letter to the judges in Wirecard trial via his lawyer in July 2023.
Image: dpa / Sven Simon / Frank Hoermann
Disconcerting Data Points
Given these examples and the increasing frequency of revenue fraud-related stories in fintech, we set out to determine whether this was an issue of perception bias or a genuine concern for the sector. To do so, we analyzed news stories across a few major startup sectors for the use of related terminology. Our analysis compares media coverage for the different industries against a related set of terms (‘revenue fraud’, ‘faked revenue’, ‘financial fraud’, ‘accounting fraud’) and calculates the expected frequency of overlap between two sets against the observed frequency.
The results show a notable correlation between Fintech and revenue fraud-related terms, posting a result of 9.19. To put that in perspective, the next closest sectors, Healthtech and B2B Software as a Service (SaaS), yielded results of 4.17 and 2.45, respectively, spotlighting a seemingly distinct problem within fintech.
As we can observe, there is a much stronger relationship present for the Fintech sector, indicating a much stronger overlap in coverage of Fintech and revenue fraud than has been observed in the other industries.
It’s worth noting that five out of the seven industries weren’t able to register a statistically significant relationship, with P-values indicating low confidence (e.g. P-value of 0.002: a 0.02% chance the frequency may be higher).
We can also analyse correlation between industries and fraud related terminology in Google Trends data, to understand whether this pattern exists in data from the search engine itself. This would indicate whether there is a greater level of awareness and interest in the issue of revenue fraud in any particular startup sector.
Source: Contextual Solutions, Google Bard
While the difference across the seven industries is less pronounced with this approach, it is clear that Fintech still leads the pack. We can therefore assume that not only does Fintech appear to have a greater problem with revenue fraud, it has also left a more significant impression on the public - damaging the reputation of the sector as a whole.
Source: Contextual Solutions, Google Bard
Behind the Faux Financials
Why does Fintech, a sector supposedly at the forefront of transparent and secure transactions, find itself grappling disproportionately with revenue fraud?
● Pressure to Perform: Fintech startups often face immense pressure to demonstrate constant growth and profitability to attract and retain investments in a competitive market. This pressure may inadvertently encourage the embellishment of financial figures to uphold a favorable market position.
● Complexity and Innovation Appetite: The innovative and complex nature of Fintech products sometimes allows these companies to operate in regulatory grey areas, where oversight can struggle to keep pace with evolution. Here, a lack of clear standards may inadvertently provide more room to manipulate revenue figures.
The Formidable Challenge of Addressing the Problem
Despite the discernible issue, addressing revenue fraud in Fintech startups is fraught with challenges.
● Lack of Scrutiny from Board Members: Board members, keen on capitalizing on the Fintech boom, might sometimes overlook discrepancies, prioritize rapid growth over compliance, or lack the technical understanding to scrutinize financials critically.
● Deficient Transparency: Fintechs, though technologically advanced, sometimes obfuscate true financial performance through complex transaction structures or employ convoluted business models that hinder clear financial auditing and analysis.
● Accounting Practice Disregard: Startups might prioritize agility and innovation over stringent adherence to traditional accounting practices, which, while agile, might compromise the fidelity of financial reporting.
● Regulatory Lacunae: Existing regulatory frameworks may not be adequately equipped to navigate the unique challenges posed by Fintech entities, given their novel business models and transaction methods.
Conclusion
While Fintech brings a plethora of innovations and conveniences into the financial sector, it's vital that we address the seemingly disproportionate incidents of revenue fraud to safeguard the sector’s sustainability and credibility.
Striking a balance between nurturing innovation and ensuring stringent adherence to ethical accounting and transparency is crucial to mitigating the prevalence of fraudulent financial reporting in the sector.
The road ahead should involve structured regulatory frameworks, educational initiatives for board members, and an ingrained culture of transparency and adherence to accounting standards within Fintech startups, paving the way for sustainable and honest growth.
