Mercury, the popular US neobank with a focus on tech startups, will terminate accounts for users in 15 African countries by August 22, 2024. This closure, part of a wider one that affects 37 countries globally, would disrupt the banking relations of hundreds of tech firms.
Founded in 2017, Mercury is a growth-stage fintech that provides banking services to startups worldwide. While not a typical bank, they work with a mix of middlemen (BaaS) and banks directly to offer their services to their customers.
The trigger for Mercury’s decision appears to be the tightening of regulatory requirements and compliance standards. The bank’s new policy reflects heightened scrutiny associated with the Financial Action Task Force (FATF) Grey list. Countries on this list, including Nigeria, Burundi, and others, face additional burdens due to perceived deficiencies in combating money laundering and terrorism financing.
Mercury’s restriction aligns with a broader trend observed in the fintech sector. In recent years, regulatory bodies globally have intensified their focus on compliance, particularly for high-risk jurisdictions. This shift has led institutions to reassess their exposure to risks, resulting in more conservative operational policies.
For African startups, the withdrawal represents a major challenge. The bank has been a key partner for many startups, providing banking services that facilitate cross-border transactions and manage venture capital intake. Its services allowed startups to operate with U.S. dollar accounts, crucial for attracting and handling foreign investment.
Mercury’s growth and chokehold on the startup banking community have been undeniable. Unsurprisingly, in 2021, they raised a mega $120 million in their Series B round. For context, the median Series B raise was $26 million while the average was $45 million in 2021. Their raise was five times the average ticket, showing investors’ bullishness and perhaps, confidence in the strategy – going after typically excluded members of the banking system.
The current situation is also influenced by the broader context of banking instability, one that has affected fintech in recent years. The case of Silicon Valley Bank (SVB) in March 2023, the second-largest bank collapse in American history, is not lost on anyone. Once a crucial banking partner for tech startups, SVB faced insolvency due to a combination of liquidity issues and poor risk management.
In the wake of its takeover by the Federal Deposit Insurance Corp., fintechs sought viable alternatives. While several platforms rose to the occasion, Mercury came out top. Within a weekend, the company spawned a new product, Mercury Vault, offering $5 million in FDIC insurance via partner banks and sweep networks distributing deposits across banks to get higher FDIC insurance.
After SVB went under, around 26,000 customers migrated to Mercury in 4 months, transferring over $2 billion in deposits. These new clients stayed, quadrupled Mercury’s annualized revenue run rate and pushed the firm closer to doubling its 2023 transaction volume. Y Combinator graduates made it their preferred choice; over 50% of each cohort joined the fray.
So, what happened?
Mercury’s rapid growth and diverse client base, including startups from high-risk regions, contributed to its issues. The business has 100,000 business customers in nearly every country. United Nations recognises 195 countries but as of 2021, it had customers in over 200 countries. This kind of geographical spread means that Mercury has taken on customers from every jurisdiction.
Federal investigations into the service revealed weaknesses, especially when it comes to having accounts opened for clients in Russia, Myanmar, and Pakistan. This led to some adjustments and key changes.
Plus, the startup has been battling a lawsuit from one-time now-bankrupt BaaS partner Synapse, and increased regulatory scrutiny from American regulators for onboarding customers in legally risky jurisdictions, many of whom leverage “questionable methods to prove they had a presence in the U.S.”
It is in response to [these] pressures, that Mercury decided to close accounts for users in several high-risk countries, including Nigeria. The move aims to mitigate compliance risks but has significantly impacted its clients who relied on it for international transactions and funding management.
Clinton Oyelami, CEO & Cofounder of Swerv, a cross-border funds disbursement service, says a major reason for this is fraud-related transactions, which often stem from inconsistent compliance measures, meaning banks extend collections to fintechs that often transfer assets to USD accounts for their customers.
“When compliance procedures are not robust, fraudulent transactions can slip through. This can lead to issues, such as an Interpol case being traced back to an account holder. Resolving such cases can be difficult, mostly if the company involved operates virtually. This creates more problems for banks, potentially leading to fines or legal consequences, Oyelami tells Bendada.com.
Nigeria, in particular, is considered a high-risk country due to coordinated cybercrime, and this is not the first instance of punitive action. Mercury implemented similar measures in 2021 and 2022.
“I’m surprised they reopened to Nigerian accounts, but the current closure aligns with a broader trend. Banks like Wise and others are also restricting services to Nigeria for similar reasons. It seems inevitable that these closures will continue due to the high risk associated with fraud,” says Oyelami.
Mercury’s decision is not an isolated incident but part of a pattern observed in the fintech industry. Similar restrictions have been seen in the past, such as the 2022 account closures affecting startups linked to prominent accelerators like Y Combinator. These actions often followed scrutiny from partner banks or watchdog, indicating a reactive approach to managing compliance risks.
Wole Ayodele, CEO of payments infrastructure provider Fincra, thinks the problem is very nuanced because most, if not all of Africa is classified as high risk when it comes to international banking.
“Most western financial institutions also look at the revenue they can get from banking Africans vs the risk and more often than not decide that banking/providing Africans access to certain global financial services is not worth the risk. Startups being shutdown is not an isolation, many africans have also had their personal Monzo, Revolut, Wise etc accounts blocked or closed for no justifiable reasons as well,” Ayodele tells Bendada.com.
The tightening of KYC (Know Your Customer) and AML (Anti-Money Laundering) standards reflects a growing trend in the financial sector. Institutions are increasingly prioritizing compliance over market expansion, particularly in jurisdictions perceived as high-risk. This trend has been exacerbated by recent regulatory crackdowns in the U.S. and other major markets.
“Aside from the OFAC list, other prohibited lists, and the FATF grey list, each startup has its own risk tolerance and goals. Mercury has always focused on U.S. founders, Since this is not the first time it will be closing accounts belonging to African founders it is likely due to their internal policies and the information they have, says Victor Alade, CEO and Cofounder of Raenest, a fintech helping African startups get more control over their growing global financial ops.
Way out?
As has been raised over the past year, African startups need local alternatives to U.S. banks, although this does not come without its own set of challenges. For Wole, the solution is Africans (or people who care) building out these products and services ourselves, still in partnership with these western financial institutions.
“However, a company like Fincra or other builders that has distinguished themselves and gotten requisite licenses and AML frameworks helps to de-risk Africa for them. For Fincra’s USD Account API for instance, we have gotten requisite approvals to specifically onboard Nigerians, Kenyans, Ghanaians, Egyptians, Senegalese and several other Africans resident in Africa or in the west,” he says.
“Such [a] solution comes out to be far more resilient in the face of these risk-based account shutdown of Africans,” Wole adds.
“A ripple effect we might see is similar clampdowns from other companies on Nigerians and tougher onboarding processes for African-focused startups. The way forward is to develop solutions with Africa in mind, which is our goal at Raenest,” Alade explains.
“Most of the clampdowns are coming from startups and companies that do not initially focus on Africa. At Raenest, we’ve combined a user-centric approach with strong compliance adherence to better serve Africans,” he says.
