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How bad are bank-account closures for H.K. fintechs?

Crypto players are the worst affected among small-business struggles to access bank accounts, but open banking might help.



Photo by Abel Pérez on Unsplash

Banks in Hong Kong have become notorious over the past several years for refusing banking services to small enterprises, a problem that is acute for those in the crypto-currency space.

These companies raise just about every red flag imaginable: transferring money, exchanging assets, dealings in tokens or digital coins that banks don’t like or understand, and question marks over identifying the customers.

Nonetheless, last year several crypto exchange companies, including ANX, Gatecoin and OKEx, not only lost access to bank accounts, but in some cases the banks froze the accounts of the companies’ principals, according to people familiar with the situation.

New open-banking laws could, however, offer a lifeline to those companies with proper governance.

“Administrative measures”
When crypto entrepreneurs lose access to banking, they do not receive any warning or explanation. The companies simply receive letters citing “administrative measures” informing them they were now out of luck, according to sources familiar with some of these events.

Aurelien Menant, founder and CEO of Gatecoin, says HSBC banked his company for four years, until this spring, when it abruptly revoked services. (HSBC declined to comment.)

The disruption forced Gatecoin to freeze its customers’ funds for three months, preventing users from cashing in on the meteoric rise in prices of bitcoin and other coins tradeable on Gatecoin’s exchange.

“We’ve been spending half our time working on solutions for a bank account, losing ground to our competitors,” Menant said.

ANX and OKEx officials declined to comment, citing ongoing discussions with banks.

Silence and rumors
These problems for small businesses in Hong Kong have been mounting for several years, but the raft of closures came on the heels of mainland China’s banning initial coin offerings and coin exchanges. Several industry players have speculated to DigFin that banks, perhaps with the tacit blessing of the Hong Kong Monetary Authority, are trying to anticipate Beijing’s desire to cast out crypto-currency exchanges from the territory.

Several banks declined DigFin’s request to speak on this topic, and the HKMA pointed to its public comments around bank account openings in general – but declined to speak specifically about fintech companies.

This silence, and the refusal by banks to tell these businesses why they’ve been cut off, leaves a vacuum for the rumor mill. It also makes it difficult for people trying to improve the situation know whom to talk to. Banks and HKMA executives appear to passing the buck between them; and though some bitcoin businesses are run by honest people, others are poorly managed or fraudulent, making it hard to generalize about their situation.

“It’s hard to find a solution because no one wants to identify the problem,” said Karen Farzam, co-founder of WHub, a startup community. She has raised the issue with government officials on behalf of startups in general, but the lack of accountability made it hard to reach a resolution.

Timid banks, KYC concerns
Banks fear massive punishments from being caught with clients from the underworld, such as when HSBC was fined $1.9 billion by U.S. authorities over its Mexico branch funneling money from drug lords. That has led the banks in Hong Kong to become overly cautious.

“Branch managers are now discouraged from taking risks,” says a compliance consultant. “Startups who don’t fit their checklist get lost.”

Some people think the onus is on startups with risky business models. Samson Lee, founder and CEO at CoinStreet Partners Group, an investor and advisor in tokens, says businesses get shut out of banking because they lack proper controls around know-your-customer, money laundering and terrorist financing.

Is that fair? Some bitcoin exchanges are opaque, but the likes of ANX and Gatecoin say they want to be licensed, regulated entities.

“The KYC standards at ANX are high,” said a consultant familiar with the company. “They’re spending millions from their token sale to do KYC and proper transaction monitoring.”

Menant says KYC is just an excuse. “Bankers are just too conservative,” he said. After losing service from HSBC, Gatecoin ran through another eight banks in Hong Kong, and they denied it service over minor administrative gaffes.

“We monitor transactions and do a full KYC check,” he said. “I understand we’re a risky client, which is costly to a bank – but then develop a business model that’s profitable, like charging us transaction fees.”

HKMA’s response
Even if these companies fail reasonable KYC/AML tests, the abruptness and brusqueness of their account closures seems to contradict the HKMA’s own efforts to ease the crunch.

For example, in September 2017, the HKMA warned authorized institutions not to undermine financial inclusion and treat customers fairly, based on principles of transparency, reasonableness (including not using AML/counter-terrorist financing as the ground for closing an account when it is actually for other considerations) and efficiency (“where an application is rejected, [give timely feedback for] the reason for rejection as appropriate”).

Startups have made do by jerry-rigging relationships with companies or banks from outside of Hong Kong, which advance them credit lines or let them use their accounts. Gatecoin now works with banks from Europe. Other exchanges may rely on help from unregulated, dodgy places – which leads to a downward spiral of opacity.

The HKMA has worked to ease the situation for many small companies, noting that the actual number of denied accounts is no more than 10% of applications. It has encouraged banks to set up special customer-onboarding teams for startups, including tech companies.

WHub’s Farzam says she hasn’t heard as many complaints in the past year – although she doesn’t know if that’s because the situation is easing, or if startups are simply bypassing banks.

Are fintechs welcome in Hong Kong?
But so long as the HKMA wants to champion Hong Kong as a fintech center, the inability of blockchain- and bitcoin-related companies to access the banking system is an embarrassment – and potentially a problem for innovation.

Another reason why WHub’s members are complaining less could be that more blockchain-related companies prefer to set up in Singapore or other places; it’s an untestable, but reasonable, assumption. There could also be a point at which some companies actually leave Hong Kong, although no one DigFin spoke to for this story was aware of any actual departures.

People including entrepreneurs like Menant hope the HKMA will be able to herd banks toward a solution: the regulator has been vocal in its desire to see Hong Kong become a global fintech hub. So far it seems the regulator can’t force banks to be more accommodating to startups – but help could come in another way.

Open banking: new possibilities
The HKMA is introducing its Faster Payment System in September 2018, supporting the use of mobile phones and emails for payments among banks and e-wallet operators. This, along with HKMA’s push for open APIs, should force banks and e-wallet providers to send and receive payments.

By opening money transfers among individuals and businesses, including by e-wallet players, might SMEs find new lifelines?

Local challengers such as TNG Wallet welcome this as a means of leveling the playing field, but it could also mean companies with virtual banking licenses could lend to companies shut out of traditional banks – assuming the KYC and other compliance requirements are sufficient.

This could prove whether crypto companies are villains with lousy controls, or victims of overbearing banks.

CoinStreet Partners’ Lee says open banking will also be good for blockchain, as it could provide the means for enabling banks and e-wallets to transfer assets without having to reveal their information to competitors.

Open banking could provide entrepreneurs with both new sources of account services, and new business models – if they survive that long.

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