Freeze on Accounts Get African Startups Mad. Sanctions against Russia Might be to Blame
Something strange happened in Africa around March 1st when dozens of African startups received a disturbing notification from their banks.
Their accounts were being suspended. The reason? Unknown. A great tsunami for almost a week left the rocketing African fintech-system in panic.
Payments were bounced and some enterprises couldn’t even access their funds. It created chaos, as management teams scrambled to find alternative ways of getting paid. What unusual activity occurred, who is the partner that pulled the plug and why did this affect only African startups?
Everything Started in San Francisco
At the beginning, some startups thought it was a simple glitch, choosing to wait a couple days, but people started tweeting about it. After, it was noticed that all the startups were clients of Mercury, a San Francisco-based digital bank for startups, that blocked their accounts without prior communication, just saying by email to the affected companies that its compliance team had flagged the accounts for suspicious behavior.
According to its own data, Mercury, which has $4 billion in deposits from more than 40,000 companies in 200 countries, provides wire transfers, virtual and physical payment cards, and FDIC-insured bank accounts to small businesses.
The Reason? Unclear
“There’s no concrete reason why we’re blocked. The last payment we made via the account was our Delaware Franchise Tax and we did that last week,” said Charles Dairo, co-founder and CEO of Beezop, one of many startups whose accounts were temporarily blocked. Other founders who used the bank for more frequent transactions complained that the pending transactions they sent out are getting bounced and this is affecting their fiscal operation, media said.
As reported by Abukabar Idris, an african Fintech expert, “Mercury’s CEO, Immad Akhund, emailed to say that the action had been prompted by the fintech company’s bricks-and-mortar banking partner, the Memphis-based Evolve Bank & Trust, which provides the fintech with regulatory cover for services such as FDIC-insured bank accounts and debit card issuing”.
The mystery has become much more tricky, even because the direct cause of the suspension is - till now - unclear. In the previous weeks, both Mercury and Evolve Bank & Trust did not respond to requests for comment by media, but multiple experts at international and Nigerian banks, interviewed by Rest of World, thought that “the unprecedented sanctions imposed on Russian financial institutions following the country’s invasion of Ukraine have spurred banks to review accounts in ‘high-risk’ jurisdictions worldwide". When this happens, African companies are often caught up.
Was it because of sanctions against Russia?
Bolakale Mallick, a compliance professional and co-founder of Regcompass, a regulatory compliance outfit based in Lagos State, said to African Business that “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 labeled.
Could Russian sanctions really infect African startups with access to investment? It could be. Is well known how companies in Africa have long struggled to meet “know your customer” requirements, cutting them off from international finance.
However, the suspensions have highlighted a perennial problem for African startups when it comes to international banking. African startups often prefer not to domicile their funds in local banks, where they have to contend with restrictive capital controls.
In Nigeria, for example, where the currency’s value has fallen progressively, businesses and individuals are worried that the banking regulator might forcibly convert dollar deposits into the local currency.
The Lack of Trust by The West. The Struggle of African Fintechs
But opening an international bank account can be challenging. Opening a US bank account is one of the hardest things an African startup has to do, said Wole Ayodele, CEO of Fincra, a Nigerian fintech providing international business banking services to African startups.
Many investors require startups to incorporate in business-friendly jurisdictions, such as Delaware in the US, as a precondition for venture funding.
International KYC rules has been settled up with the aim to prevent terrorist financing, money laundering, and other financial crimes. Plus require banks, and anyone who’s processing financial transactions, to collect large amounts of data on their end clients and to monitor their banking activity.
And that’s the point. These are often very difficult for startups in Africa. “National identity records are rarely comprehensive, and there are often no standardized systems for addresses, meaning that the startups struggle to provide even the most basic data that the regulations require”, added Abukabar Idris.
In the previous years, even if a company (both startup or fintech) passed the “know your customer” requirements as an African, they could get shut down for vague reasons. Sometimes when foreign banks, mostly Western, discover unusual transaction patterns by African customers or customers based on the continent, rather than investigate, they are more likely just to block accounts en masse. The difficulty of meeting the bar for KYC in Africa has meant that many parts of the continent are unable to access global payments systems.
“Fintech companies and banks often won’t work with customers in countries that, like Nigeria, are seen as having a high risk of fraud, leaving local companies and individuals to find unconventional ways to access international platforms or services”, underlined Abukabar Idris. Some startups use cryptocurrency and virtual dollar-denominated bank accounts created by local fintechs, but it is not uncommon for people to ask for help from contacts based overseas, and to use hard-currency-denominated gift cards in lieu of dollars, to get around the restrictions.
Scarce Capital Access, Any Solution?
African companies have used Mercury to set up US-domiciled bank accounts to help them receive payments and investment from international partners, however, African startups should also work with multiple financial providers to ensure that restrictions on one account do not spell disaster for their business.
If Western financial institutions are closing their doors, Beijing is more than welcome to open to African startup champions. Well, China is not the US, we know, but Chinese conglomerates provide a much easier way to access capital. China has been Africa’s largest trading partner for the last decade, generating a record $185.2 billion between January and September 2021 alone.
Chinese private investors are now turning their attention towards sectors such as the booming African fintech space, bringing capital and knowledge from success stories in their domestic telecommunications and digital sectors. African countries asked to pay attention to domestic resources, China is giving them the attention they asked for. Why the West should not?