I’m starting to worry about FinTech as they seem to have fallen foul of regulatory compliance and, as a consequence, customer trust. The biggest challenge for a challenger is to keep customer trust AND regulatory compliance. This is what we are seeing having consequences today.
The fact I'm starting to worry about FinTech, as an advocate of technology innovation in finance, is therefore a worrying statement. As I see more and more issues rising, I’m thinking the best part of FinTech is where they don’t do what banks do or, maybe more importantly, have bankers organise what banks do and focus on the bits that banks do badly or don’t do at all. For example, my favourite FinTech unicorns are firms like Stripe, Square, NuBank, PayTM, Klarna and a number of others. Why? Because they either solve the issues that banks do badly – like serving small businesses and making online checkout easy – or they serve the customers banks don’t serve – the unbanked and underbanked.
My worry is that where FinTech moves into core banking territory, they are doing it more and more badly with more and more risk.
This is why I raised the questions about Monzo last week, and asked whether new banking really was 10x better. Those blogs got quite a reaction, with many more people emailing me with issues. In particular, I got quite a number of contacts about another UK FinTech Monese.
Monese offers current accounts and money transfer services as an alternative to traditional banks. Then I got whole load of people saying the same thing about Anna Money, Pockit and other companies like Skrill. I’ve personally had issues with Skrill and others, where accounts have been frozen and funds taken. Luckily, in my case, lose £100 here or £200 there is not a big issue but, for some, it’s a huge issue. Checkout this email I received:
Hi hope you are well just came across a online article of yours regarding Monzo and wanted to ask if you could have a look into Monese bank as they have blocked hundreds if not thousands of accounts including mine leaving people in turmoil for months and customer support is non existent, I'm possibly facing eviction due to this and going hungry for days due to this even though I've sent proof of where the funds in my account have [come] from and it's just beggars belief
Similarly, the Monzo stole our money facebook group has started expanding into other areas, including issues with Monese and other neobanks. In fact, I got a little tip that Section 166 of the Financial Services and Markets Act 2000 is a big issue here. What is Section 166? It's all about having skilled people who understand AML and transaction monitoring to report SARs (Suspicious Activity Reports). These young challengers don't have those skilled people, or enough of them, is the implication. In other words, it's a UK regulatory thing.
All of this is wrapped into how these challengers and neobanks began. A company that began with simple payment services and then became a bank has to do the full compliance and due diligence for customer onboarding. We, in the banking industry, know that this is all about KYC and AML. For those who are not in the industry, it’s a regulatory compliance process to ensure there is no money laundering – Anti Money Laundering (AML) – through customer vetting – Know Your Customer (KYC).
All well and good.
The issue is that a lot of challengers don’t appear to have done effective KYC and AML in their customer onboarding. Now, they are doing this retrospectively and it’s pissing off customers big time, mainly because they are freezing or closing accounts during the process. No wonder customers are unhappy. If you’ve been happily running an account for a year or two and suddenly it is frozen or shut-down, with no notice or explanation, it’s annoying and, for some, life shattering as per the email I received.
So, let’s all put our money into bitcoin, shall we?
Well, no, as they’ve also had their issues. I had 15 bitcoins on the Mt.Gox exchange when they were bankrupted. I wasn’t bothered at the time – they were only worth around $10,000. The exchange collapsed, they were lost and was I bothered? Annoyed, yes; bothered, no. Thing is that they would be worth around $750,000 today. Annoyed yes; bothered, yes.
Thing is that I carried on investing in crypto as an experiment, so I’m not that bothered.
But then people are losing on crypto all the time. For example, over $100 million was lost when the CEO of Quadriga exchange ‘died’ and was the only person with the passwords for the cold storage drives of the cryptocurrency investors.
In this context, another company who readers have been telling me has similar issue to Monzo is Wirex.
Wirex is a company with the aim to make it easy to invest in crypto and traditional currencies: “we're making fintech simple”. Well, it’s not that simple. In a blog on April 8, they make it clear that the FCA, the UK regulator, has told them to stop onboarding new customers and block existing customers from converting their crypto to fiat currencies and vice versa.
From the 8th of April 2021, you will be temporarily unable to add funds to your currency accounts via bank transfer or using a credit or debit card. You will also be temporarily unable to make fiat-to-cryptocurrency exchanges in the Wirex app …
These temporary measures have been put in place following updated guidance from the FCA. Wirex is currently one of a small number of companies in the UK operating under the Temporary Permissions Regime (TPR), with the aim of receiving permanent registration.
What is TPR?
The temporary permissions regime (TPR) enables relevant EEA firms and funds that were passporting into the UK when the transition period ended to continue operating temporarily in the UK now that the passporting regime has fallen away.
In other words, it’s a Brexit thing. What a mess.
From a customers’ perspective, accounts being suddenly blocked with no explanation appears to be fintechs behaving badly. From a FinTech’s perspective, accounts having to be blocked because the regulator is telling them they have to be, is just bad news. From a company’s perspective, whether FinTech or bank, poorly communicating with customers is the ultimate mistake. After all, finance is all about a psychological trust and agreement between customer and provider; when that trust is broken, people talk.
They are talking to me a lot, and I can see the frustrations from both sides.
Nevertheless, at least Wirex has blogged to try and explain it.
But these issues are not confined to the companies I’ve mentioned. I see the issues at N26, the German challenger bank, who have fallen foul of AML and KYC rules across Europe; I saw the issues first hand at Wirecard, and the to’s and fro’s with BaFin, the German regulator; I’ve seen the distress as China closed down P2P lenders and blocked Ant Group’s IPO … I could go on as there’s plenty more. Add to this that there’s also been bad behaviours, like Powa Technologies, who went bankrupt on a mixture of hedonism and narcissism.
There are some standouts doing better, with firms like Starling Bank and Clearbank not falling foul of customer feedback and regulatory oversight. What’s notable about those two is that they were created by former bankers. FinTech’s should maybe do what banks don’t do, and leave banking to bankers? After all, it’s a matter of trust and 83% of Britons think that challenger banks are not as reliable and trustworthy as ‘traditional’ banks.
These challengers and neobanks falling foul of regulators and communicating poorly is a major issue, but then there’s another one. Profit. If profitability isn't a "core metric", what is? N26’s co-founder Maximilian Tayenthal told the Financial Times in January 2019 that “in all honesty, profitability is not one of our core metrics”. Whoops.
We are at a point where the challenger banks will be challenged (a) by regulators and (b) by investors. They cannot get more support on a pure growth model and, if they are growing fast, are they doing it in a due diligence way where KYC and AML procedures are full adhered to?
It’s interesting to watch.
N26’s Maximilian Tayenthal’s comments reminded me of Wal*Mart’s battles with Amazon. They acquired Jet.com in order to make Marc Lore, founder and CEO, their designated digital leader, earning twice as much as Wal*Mart’s CEO. Over lunch, Marc shared a story about his teenage daughter who had started an online sticker-selling business. When his daughter told him she was making money, he was shocked. “How are you profitable?” he asked her. “Well, Dad, it’s easy,” she replied. “You just make sure your revenues are higher than your expenses.” “Oh,” Lore recalls saying. “I never thought about it that way.”
Yea, right …
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...