Mercury, a popular US neobank that focuses on tech startups, will close accounts for users in 13 African countries by August 22, 2024. The closures will disrupt the banking relationships of many local tech companies.
Founded in 2017, Mercury is a growth stage US-based fintech company providing banking services to startups across the globe. It is not a typical bank, but works with intermediaries (BaaS) and banks directly to provide services to their customers.
Mercury Bank’s decision appears to have been prompted by stricter regulatory requirements and compliance standards. The bank’s new policy reflects increased scrutiny linked to the Financial Action Task Force’s (FATF) grey list, where countries such as Nigeria and Burundi face additional burdens due to perceived deficiencies in anti-money laundering and anti-terrorist financing measures.
Mercury’s regulation is in line with a broader trend seen in the fintech industry. In recent years, regulators around the world have placed increased emphasis on compliance, particularly in high-risk jurisdictions. This shift has caused financial institutions to reevaluate their exposure to risk, resulting in more conservative operating policies.
This withdrawal poses a major challenge for African startups. The bank has been a key partner for many startups, providing banking services to facilitate cross-border transactions and manage venture capital intake. The bank’s services allow startups to operate with US dollar accounts, which is essential for attracting and handling foreign investment.
Mercury’s growth and influence in the startup banking community is undeniable. Not surprisingly, the company raised a whopping $120 million in a Series B round in 2021. For reference, the median Series B amount raised was $26 million, while the average in 2021 was $45 million. The company’s amount raised was five times the average, signaling investor bullishness and confidence in the strategy of going after members typically excluded from the banking system.
The current situation is also influenced by the broader context of banking instability that has affected fintech in recent years. Everyone remembers the collapse of Silicon Valley Bank (SVB) in March 2023, the second largest bank failure in American history. Once a key banking partner for technology startups, SVB faced collapse due to liquidity issues and poor risk management.
Following its acquisition by the Federal Deposit Insurance Corporation, fintech companies looked for viable alternatives. Several platforms responded to the opportunity, with Mercury coming out on top. Over the weekend, the company created Mercury Vault, a new product that offers $5 million in FDIC insurance through partner banks and a sweep network that distributes deposits among banks to earn higher FDIC insurance.
After SVB collapsed, approximately 26,000 clients migrated to Mercury in four months, moving more than $2 billion in deposits. These new clients stayed with Mercury, quadrupling the company’s annual revenue run rate and putting it on track to nearly double deal volume by 2023. Mercury is a preferred choice for Y Combinator alumni, with more than 50% of each cohort participating.
what happened?
Mercury’s rapid growth and diverse customer base, including startups in high-risk regions, contributed to the company’s problems. The company has 100,000 corporate customers in nearly every country. As of 2021, the company has customers in more than 200 countries, out of 195 countries recognized by the United Nations. This geographic spread means Mercury has customers in every jurisdiction.
A federal investigation into the service revealed weaknesses, particularly around opening accounts for customers in Russia, Myanmar and Pakistan, which led to some tweaks and significant changes.
Additionally, the startup has been battling lawsuits from former, now-bankrupt BaaS partner Synapse, as well as increased restrictions from U.S. regulators over onboarding customers in legally risky jurisdictions, many of which use “dubious methods to prove their U.S. presence.”
it is, [these] Under pressure, Mercury decided to close accounts of users from several high-risk countries, including Nigeria. While the move was intended to reduce compliance risks, it had a significant impact on customers who relied on the company for international transactions and money management.
Clinton Oyelami, CEO and co-founder of Swerv, a cross-border funds payment service, said the main reason is fraud-related transactions that often stem from inconsistent compliance measures, leading to banks extending collections to fintechs, where banks often transfer customers’ assets into US dollar accounts.
“Without strong compliance procedures, fraudulent transactions may slip through. This can lead to issues such as Interpol cases being traced back to account holders. Resolving such cases is particularly difficult when the companies involved operate virtually. This creates further problems for banks and can lead to fines and legal action,” Oyelami told Bendada.com.
Nigeria, in particular, is considered a high-risk country due to organized cybercrime, and this is not the first time the company has taken punitive action against the country: Mercury implemented similar measures in 2021 and 2022.
“While we were surprised to see the reopening of Nigerian accounts, this closure is in line with a broader trend, with banks such as Wise Bank restricting services to Nigeria for similar reasons. Given the high risks associated with fraud, it seems inevitable that these closures will continue,” Oyelami said.
Mercury’s decision is not an isolated incident, but part of a pattern seen in the fintech industry. Similar restrictions have been seen in the past, such as the 2022 account closures that affected startups with ties to prominent accelerators such as Y Combinator. These measures often come after scrutiny by partner banks and regulators, signaling a reactive approach to managing compliance risks.
Wole Ayodele, CEO of payments infrastructure provider Finkla, believes the issue is highly sensitive as most or all of Africa is classified as a high-risk region when it comes to international banking.
“Most Western financial institutions weigh the risks against the revenue they can get from banking Africans and often decide that banking Africans and providing them access to certain international financial services is not worth the risk. Startups are not alone in being shut down and many Africans are also having their personal Monzo, Revolut, Wise etc accounts blocked or closed without justification,” Ayodele told Bendada.com.
Tightening KYC (Know Your Customer) and AML (Anti-Money Laundering) standards reflect a growing trend in the financial sector. Financial institutions are increasingly prioritizing compliance over market expansion, especially in jurisdictions that are perceived as higher risk. This trend has been exacerbated by recent regulatory tightening in the US and other major markets.
“Apart from the OFAC list, other banned lists and the FATF grey list, each startup has its own risk tolerance and goals. Mercury has always focused on US founders. This is not the first time they have closed an African founder’s account, so it is probably due to their internal policies and the information they have,” said Victor Aredo, CEO and co-founder of Raenest, a fintech company that helps African startups gain more control over their growing global financial operations.
Exit?
As has been raised over the past year, African startups need local alternatives to U.S. banks, but this comes with its own challenges. For Wole, the solution is for Africans (or those interested) to build these products and services themselves, even as they partner with these Western financial institutions.
“But those who differentiate and obtain the necessary licenses and AML frameworks, like Finkla and other developers, can help mitigate risk in Africa. For example, in the case of Finkla’s USD Account API, they have obtained the necessary approvals to specifically onboard Nigerians, Kenyans, Ghanaians, Egyptians, Senegalese, and many other Africans residing in Africa and the West,” he says.
“like that [a] “This solution proved to be much more resilient in the face of risk-based closure of African accounts,” Wole added.
“The expected ripple effects could include similar crackdowns on Nigerians by other companies and tougher onboarding processes for Africa-focused startups. Going forward, Raenest’s goal is to develop solutions with Africa in mind,” Alade explains.
“The majority of crackdowns come from startups and companies that are not originally focused on Africa. At Raenest, we have combined a user-centric approach with strict compliance enforcement to better serve Africans,” he said.
