'A huge mistake': Lessons from the JPMorgan-Frank fintech deal

Millions of fake students. An $18,000 payout for concocting synthetic identities. Emails that brushed off the possibility of "orange jumpsuits" and revealed frantic cover-ups.

Bank-fintech acquisitions that fizzle rarely have details as salacious as the saga of JPMorgan Chase and Frank. Earlier in January, news broke about a lawsuit that JPMorgan Chase filed on Dec. 22 alleging that it was defrauded by the founder of Frank, a college financial-planning website that it acquired in September 2021. The bank paid $175 million to acquire Frank on the premise that it had 4.25 million customers with accounts. In reality, the vast majority were fabricated, according to the complaint, and there were fewer than 300,000 true users. Charlie Javice, the founder of Frank, filed her own lawsuit against Chase the next day, countering that Chase launched "groundless investigations" into her conduct to deny the compensation it owed her, including a $20 million retention award.

Other bank-fintech deals have collapsed over the past year, such as UBS's bid to merge with the automated wealth management firm Wealthfront and Patriot National Bancorp's deal for the neobank American Challenger Development Corp. But none have made the headlines or incited as much curiosity as the Chase-Frank story.

It sparks questions about what the bank could have done differently during due diligence and why troubling aspects of Frank's past did not give pause sooner. Observers point out there were warning signs dating back years, including investigations by the Department of Education and Federal Trade Commission.

There are also broader lessons for banks targeting fintechs for acquisitions, from the importance of balancing speed with due diligence and the need to weigh carefully what a startup's future will look like within a legacy institution.

"Entrepreneurs turn into these media stars," said Mathieu Shapiro, managing partner at law firm Obermayer, who likened the rise and fall of Frank to the scandals revolving around the health technology company Theranos and cryptocurrency exchange FTX. "Once you have the whole world talking about how great they are, it becomes harder to stand up and say, this doesn't compute, what are they actually doing to make the loan process easier?"

In JPMorgan's fourth-quarter conference call, CEO Jamie Dimon described the acquisition as "a huge mistake."

In an emailed statement, JPMorgan Chase spokesperson Pablo Rodriguez said, "Our legal claims against Ms. Javice and [Frank's chief growth officer] Mr. [Olivier] Amar are set out in our complaint, along with the key facts. Any dispute will be resolved through the legal process." Attorneys for Charlie Javice did not respond to a request for comment.

Warning signs

"There is a balance in every acquisition between speed to close and the competitive environment, with making sure you've got the right due diligence, where what you are buying will create the outcome you're looking for," said Michael Berman, CEO of Ncontracts, which produces risk performance management software for financial institutions. "Sometimes people put speed before diligence." 

There are three main reasons banks seek out fintech acquisitions, said Pieter van den Berg, managing director and partner with the consulting group BCG. Institutions may want a specific capability they bet they can obtain faster through an acquisition; they may want to absorb the talent within the fintech; or they may want the company's customer base or revenue.

"Oftentimes it is multiple factors," said van den Berg.

In its complaint, JPMorgan Chase noted that college students represented a market it wanted to better reach. It cited the 4.25 million customer count as a sign that Frank was "deeply engaged with the college-aged market segment."

"We want to build lifelong relationships with our customers," said Jennifer Piepszak, co-CEO of Chase, in a September 2021 press release announcing the acquisition. "Frank offers a unique opportunity for deeper engagement with students."

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Observers who read JPMorgan Chase's complaint wondered if there were some key steps the bank missed in due diligence.

One was vetting Frank's claims about the number of students it helped.

"If Frank's primary function was to get people through the financial aid application, and Frank promised to JPMorgan Chase that their account holders comprised [4.25] million people, that would be a quarter of all financial aid applications in America, depending on how you measure it," said Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, a nonprofit that focuses on student debt. "The market for applying for financial aid is not that big."

Pierce notes that there is a long history of scams related to helping students prepare applications. One example is the website FAFSA.com, which charged students money to help them complete the Free Application for Federal Student Aid, also available at FAFSA.gov.

"There should always be skepticism about how these private firms monetize what's supposed to be a free application," he said.

The Federal Trade Commission and the Department of Education issued warnings as well. In 2017, the Department of Education accused Frank of violating its trademark on FAFSA; Frank settled in 2018. In 2020, the FTC flagged several misleading declarations on Frank's website in a warning letter. One was the claim that consumers can obtain a cash advance of up to $5,000 for "No interest, no fees — ever," despite the fact that Frank charged a fee of $19.99 per month.

Berman points to two aspects of due diligence that he feels are crucial: experiencing the customer journey firsthand, perhaps by paying a third party to test the platform, and assigning a risk and compliance team to scour the website for claims that sounded too good to be true. After reading through the complaint, he is unsure to what extent Chase followed these practices.

In its complaint, Chase lays out the steps it took, including reviewing a spreadsheet of 4,265,085 individual students who were purportedly customers of Frank and sending an email requesting specific details to back up the number of purported users. After Javice declined to submit emails and home addresses for privacy reasons, Chase agreed to use a third-party data management vendor, Acxiom, to validate Frank's customer information. Observers agree it is unclear from the complaint how Acxiom did not uncover that much of this data was invented by a "data professor" that Javice hired. Acxiom did not respond to a request for comment.

"What any two entities decide to accept in terms of respecting privacy, coming up with a confidentiality agreement, letting a handful of people look at the actual data or not — that is all part of the negotiation process," said Shapiro. "There may be reasons why Javice wanted to insist on privacy, at which point it falls to the acquirer to say, am I willing to go forward without the information I otherwise would have gotten?"

Takeaways for future acquisitions

The alleged fraud running rampant in this case may be an outlier in the world of bank-fintech acquisitions. But many such acquisitions sputter more quietly.

In an analysis of publicly announced acquisitions, BCG found that for all deals made by financial institutions globally between 1980 and 2018, with a deal value of $250 million or more, 54% failed to create value based on relative total shareholder return over the first 12 months after the deal was announced.

A 2019 global BCG survey of 277 executives across different industries that oversaw integrations found that the top two reasons acquisitions failed to deliver value were poor integration approach (46%) and poor strategic fit (42%).

"Banks need to think through the requirements for a fintech to thrive within the bank," said van den Berg.

That means weighing the pros and cons of keeping the fintech as a stand-alone, adjacent or fully integrated business within the bank. Problems can crop up when new employees get restless or sales teams are not properly incented to sell a new product.

"If you want to buy a fintech for talent, that talent [could] start walking out the door the moment they have an opportunity because they don't want to be part of a bigger bank," said van den Berg. "When a bank wants to cross-sell product to their existing customer base, it is oftentimes harder to execute than it looks because the bank's salespeople may be unfamiliar with the solution and they may not prioritize it as much as the core products."

But keeping the company as a standalone unit "could potentially hamper you in terms of what kind of synergies you're getting from it," he added.

Banks may struggle integrating new technologies into a legacy platform. There is also the question of how well a bank's appetite for risk jibes with a startup's hunger for growth.

"Successful fintechs are successful because they continue to innovate," said van den Berg.

Pierce wonders if a similar story could play out again as fintechs and edtechs potentially seek an "escape path" through banks when financing is harder to come by. At the same time, banks may be eager to snap up this startup segment, as Chase was, to strengthen their connections to college students. Banks stopped making federal student loans in 2010 as part of the Health Care and Education Reconciliation Act.

"There has been a boom and bust cycle in banks catering to college students," said Pierce. "I think [banks] are just beginning to understand what it means to not have long, deep banking relationships with an entire generation of college educated Americans, the way that they had the generation before and the generation before that."

He points out there could also be more victims if the story repeats itself.

"Frank was salacious in a way that makes it a good story to tell in part because these users were fake, so it's not like you have students with money on the line," said Pierce. "I hope the next time it's not a story about how families were fleeced by fraudsters and big banks."