On 1 March, a number of African fintech entrepreneurs banking with US digital fintech company Mercury discovered that restrictions had been placed on their accounts, causing them to become inoperable for several days. Mercury sent emails to clients notifying them of the restriction and asking customers to get in touch if they had “questions or concerns”.
Within hours, influential voices had taken to Twitter to criticise the move. Moe Odele, a technology lawyer at Vazi Legal, shared her concerns with almost 400,000 Twitter followers:
“Blocking a startup’s bank account for no reason & no warning on the last day of the month when people have major obligations is disastrous,” she wrote on the same thread. “We have clients running around confused. Checks are being returned. Penalties are piling up. @BankMercury needs to fix this.”
In a statement to African Business, Mercury said “A few dozen accounts were flagged for suspicious activity (representing 2% of all of our customers in Africa); some of the flagged accounts were permanently closed as it was deemed they were using Mercury improperly; the rest were opened after a few days. We have since implemented more controls so we can be proactive about taking measures to minimize fraudulent activity and contain potential issues.”
San Francisco-based Mercury, which bills itself as a “banking stack for startups”, says it is a financial technology company, not a bank. It says its banking services are provided by Choice Financial Group and Evolve Bank & Trust. It provides services including checking accounts, savings accounts, debit cards, ACH payments, cheque payments and domestic and international wire transfers.
The CEO of a Lagos-based startup, who asked that his name and company be kept anonymous, says the restriction happened at a time his firm was fundraising and caused serious disruption. When some of their investors sent them money, the funds got returned to the senders, he says.
“My company was fundraising and we didn’t want it to affect us. Basically, we’ve had commitments and some people were sending in funds. We woke up one morning and we discovered we couldn’t log in to Mercury, and it wasn’t just us,” he tells African Business.
“The annoying thing is that some of the investments that came in and got reversed have not been sent back by the investor until today.”
The CEO immediately began to seek other banking service providers so that his operations could continue. He immediately tried to open a Wise account but was told the verification process would take one to three days. Shortly after the new account was opened, the company received a message from Mercury saying that their account had reopened.
Failure to consult with clients
In an email to clients on 2 March, Mercury CEO Immad Akhund said that the move to restrict accounts had been precipitated by concerns at a partner bank and said that the firm would be working on better practices in future.
“We found out yesterday that our partner bank noticed unusual activity and asked us to lock and investigate a large set of accounts with linked activity… Since it’s a reasonably large set of accounts it’s taking us some time to work through all of them but it’s the highest priority for us internally and we have more than 10 people working on this. We apologize for this sudden inconvenience and hope to put better practices in place to avoid this in the future.”
Bolakale Mallick, a compliance professional and co-founder of Regcompass, a regulatory compliance outfit based in Lagos State, said Mercury should have sought clarification from clients about suspicious transactions before restricting their accounts, which meant that affected clients couldn’t meet urgent payment obligations.
“What they should have done is to ask questions about their activities with the suspected customers. This was done later after the accounts had been frozen which was not supposed to be the situation.”
Many African startups rely on smooth banking services to fundraise, pay staff and overheads, and conduct business transactions in local and foreign currencies. Restrictions on their accounts necessitate costly emergency measures to ensure financial flows, Mallick says.
“They needed to quickly find liquidity elsewhere, borrow money in appropriate cases or rely on their own reserve capital. For those who don’t have, they borrowed money. And you know how money can be very expensive to borrow especially in times like this. High exchanges, high interest rates and everything will definitely impact them negatively.”
A cautionary tale
However, for some fintechs with large client bases, the costs of customer disruption pale in comparison to the size of the penalties they could be hit with if they fail on compliance. This can lead them to take sudden measures to check up on clients, putting the latter in a weak position.
“If you do a small transaction and there’s suspicion of risk with your account, you’re just collateral damage. They could go ahead and disable your account without looking into it deeply because your transaction volume doesn’t really count. They are not making a lot of money from you.”
Mallick sees the incident as a wake-up call for African fintechs to take compliance measures seriously and make sure that their transactions are correctly labelled.
Adding the right descriptions for transactions would make it clear to reviewers that transactions are above-board, he says. But African startups should also work with multiple financial providers to ensure that restrictions on one account do not spell disaster for their business, he says.