Last week, Mercury, a San Francisco-based digital bank for startups shut down accounts of hundreds of African tech startups, many of which are Nigerian-owned companies.
As a digital payment platform, Mercury is a complete financial stack used to build companies, and scale with Federal Deposit Insurance Corporation (FDIC)-insured bank accounts, debit cards, which allows a 3-click payment flow.
Ordinarily, these startups wouldn’t need the assistance of an international platform to run their transactions. However, because of the friction between local banks and their international partners, they find themselves at the mercy of platforms outside the country including Mercury.
The digital bank did not give clear reasons for the decision, nor did it send warning notices to the startups. It was only after a few people in the African tech ecosystem publicly raised concerns on this, that Immad Akhund, CEO, Mercury sent an email stating that the bank was acting in compliance with internal procedures. And it is working to resolve the issue quickly, seeing as it has adversely affected its customers.
“We found out yesterday that our partner bank noticed the unusual activity and asked us to lock and investigate a large set of accounts with linked activity. We are working through our due diligence on all those accounts and will be in touch with you individually with questions if we have any on your account or activity,” the email stated.
Thus far, all accounts affected cannot make any transfers from their account, nor can they use their debit cards. They are also not allowed to log in to view their accounts. This means that cheques that are being sent will not be cleared and funds cannot enter into those accounts.
Why do African startups need platforms like Mercury?
Although Mercury is not a bank, it provides banking services. Mercury works with FDIC-insured banks, including Evolve Bank and Trust, Member FDIC, to store deposits.
Experts say since most African startups have affiliations with international companies, a larger percentage of their funds as well as transactions will go through international payment gateways.
This is evident from investors -Venture Capitalists in Silicon Valley including Andreessen Horowitz, CRV, SV Angel, Liquid2, Naval Ravikant (CEO of AngelList), Joshua Reeves (CEO of Gusto), Justin Kan (CEO of Atrium), and Roger Smith (Founder of Silicon Valley Bank) among others, who invest in African startups whom are listed on Mercury’s capitalization table.
“African startups are US companies because it’s the top way to raise money or access most things. Many investors will never touch a non-US company,” Sola Akindolu, CEO Brass, said in a tweet.
Being incorporated in the US makes it easier for African startups to raise money, and Mercury makes it possible for them to open a US bank account without actually being in the US.
Similarly, the risks involved in transacting a huge amount of funds via local banks are high which banks are not willing to take. While policy regulation also poses a restriction for local banks to run such transactions, Nigerian banks among other African banks can only do what these policies permit.
“Nigerian banks would rather leverage on ‘cheaper’ avenues to generate revenue than allow startups’ funding transactions pass via their route. The time consumption, as well as regulation involved, is also quite discouraging to these startups. Hence, they prefer alternative payment gateways,” Ayodeji Ebo, Head, Retail Investments, Chapel Hill Denham, told BusinessDay.
On Wednesday, March 10, 2022, Zenith Bank took to the microblogging app, Twitter and said that it has temporarily suspended the use of its naira cards for international automated teller machine (ATM) cash withdrawals and POS transactions, as well as the monthly spending on the international transaction, has been reduced to $20 from $100 per month on naira card.
According to the financial institution, this is due to a response in today’s economic realities. This is coming at a time when startup founders will need to bring in supplies, equipment, or technology into the country and the only amount that can be withdrawn is $20 in one month.
Instead of opening accounts with local banks abroad, they would rather go to international payment gateways like Mercury to have unlimited access to the money in their account in terms of usage.
Experts say that as long as African startups require funding from foreign investors, they might still need to use banks like Mercury. Currently, the US-based fintech holds 4 billion in customer deposits for its over 40,000 businesses in over 200 countries.