FINTECH FRIDAYS

24th September 2021

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What is Debanking?  

Debanking denotes a situation in which a large financial institution withdraws banking services to a business for any number of reasons – perhaps commercial, or regulatory, such as compliance with counter terrorism financing  or anti-money laundering laws. Notoriously enough, many would trivially label debanking as fintech’s sector version of cancel culture. The term ‘cancel’ is particularly noteworthy here as with the tendency of banks to sometimes arbitrate debanking without any obvious reasons, which insinuates growing concern for fintech and cryptocurrency startups.  

An example of debanking in the financial sector

Nium, a company which provides global payment services, said that debanking- the practice of banks closing the account of clients perceived to be high risk - “nearly derailed” its Australian launch in 2015 to provide cheaper foreign exchange services than the major banks. Soon afterwards, the Singapore-headquartered company also reported to have been debanked by seven Australian banks. Granted, companies have to adopt strict banking compliance so as not to run the risk of being debanked. However, from Nium’s perspective, its reason for being de-banked is unaccounted for. Nium’s consumer head Michael Minassian expressed that ‘there is no opportunity to remedy practices if an entity is deemed non-compliant prior to debanking as well as no real opportunity to appeal the decision, or gain further clarity as to why you are being debanked, and the reasons given by the banks are opaque and very vague.

 

Moreover, Bitcoin Babe said that they have been debanked 91 times by major banks for no reason at all. Banks are described as “bullies” as “no discussion is being had because the banks don’t want to have the discussion”. Similarly, AusMerchant found itself in the same adversity as Bitcoin Babe and many other digital currency providers, despite having been told that their reason for debanking is the incongruity of their scope of services with those of the bank.

 

Implications of de-banking for fintech companies

The risk of fintech companies getting de-banked is high, especially for cryptocurrency providers in Australia. Westpac has revealed to have debanked at least 8 fintech companies a year, citing the high risk nature of segments of the fintech sector as a major rationale behind debanking. While fellow Big Four bank NAB did not disclose how many companies have been debanked, they also cited similar reasons for discontinuing or declining a fintech company’s access to their banking services. However, as mentioned above, debanking will often occur without reasonable explanation and short notice. 

 

The Senate Select Committee on Australia as a Technology and Financial center has been exploring the issue over the last few months. According to the head of the Committee Senator Andrew Braggs, banks have been cautious and anti-competitive and have even hindered access to the New Payments Platform. This is despite the platform being intended to be accessible to all business sectors and individuals for fast open access payments including fintech firms and crypto providers.  

 

Many Fintech companies and regulatory associations have voiced similar views regarding banks’ anti-competitive stance. In a submission to the State Select Committee, Fintech Australia and the Small Business Ombudsman both stated that debanking severely takes away a fintech’s chances of success, as they will have to take on operational damage due to the lack of access to basic banking services as well as needing to allocate capacity to finding alternative services. Both organisations have expressed a desire to see a review in the regulations currently in place for the industry. As long as transactions within cryptocurrency continue to stay largely unregulated, banks will continue to almost indiscriminately cancel the accounts of companies and providers in what Fintech Australia, Senator Andrews and others perceive as banks and other major companies in the finance sector protecting themselves from competitive threats.

 

To combat the lack of framework which allows banks to easily debank fintechs and cryptocurrency, the Senate Select Committee on Australia as a Technology and Financial Centre will be looking to formulate its final recommendations regarding policy on digital assets, which will be presented to the Senate in late October. 

 

Until then, debanking will remain as a significant obstacle to Fintech, especially to individuals or groups looking to advance in the cryptocurrency space; otherwise they run the risk of not only losing access to business accounts but also their personal bank accounts as well. As expressed by the Senate Select Committee, fintech companies, cryptocurrency and blockchain technology are becoming more important than ever in driving the Australian economy. Its presence within the domestic market will ensure that the country will be able to keep up with the continuous changes in global crypto and fintech markets. 

References

https://www.afr.com/companies/financial-services/bragg-committee-to-probe-major-bank-debanking-of-fintech-start-ups-20210519-p57t4a 

https://www.afr.com/companies/financial-services/de-banking-of-fintechs-is-rife-senate-committee-told-20210908-p58puh 

https://www.businessinsider.com.au/australia-crypto-exchanges-banks-regulation-2021-4 

https://www.startupdaily.net/2021/09/startup-daily-tv-the-threat-to-startups-from-debanking-fintechs-cancel-culture/?fbclid=IwAR3P79VuXAzy8cVJkqMpDyeo2ggHkYT43QrYoIctmqcwoZwALTGVTp8AMeQ 

The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.