Hey there, Justin here. In case you missed last week’s update, we’re taking some time off from the podcast in December, and will be back in January with a few remaining episodes for Season Three. No podcast means I had the opportunity this week to write about something else – something troubling…
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The Flip Notes is sponsored by Flutterwave.
We write a lot about enablement here at The Flip. How many users would shop online, for example, if payments worked better? Or, if the process of opening and managing a store were easier?
It’s one thing to launch an ecommerce store; it’s another for customers to discover it.
Last year, Flutterwave launched Flutterwave Stores, offering merchants a simple and easy way to set up an ecommerce store, accept payments and integrate with delivery partners. And last week, Flutterwave shipped Flutterwave Market, bringing together a collection of merchant stores in one place.
The market will not only make it easier for customers to shop from a range of Flutterwave merchants but will also enable customers to shop across a variety of products, from fashion and beauty to food and professional services.
Global Fintechs are Failing Users in Africa
This week, I had a hard time paying a freelancer in Ghana. To pay into her MTN mobile money account, I used WorldRemit. I funded the transaction using my US debit card. And I am currently, physically in South Africa, which I suspect had something to do with my troubles.
Minutes after making the payment, my transfer was declined and my account was summarily deleted due to reasons they are not legally allowed to tell me.
When I called, they repeated that they couldn’t tell me why my account was deleted and informed me to read the Terms and Conditions which, if I were to print, are 106 pages long.
I still don’t know why my account was deleted. I suspect it has to do with the fact that I used a US card in South Africa. Perhaps it has to do with the amount I transferred. WorldRemit’s limits for a momo transfer are GHS2400 (around $390) and I tried to transfer that maximum. (In fact, I needed to transfer more so I was planning to do multiple transfers.)
But something bigger and more problematic is happening here. It feels like any payments made to or from Africa, or involving African users, are by default considered risky or fraudulent, and as such, are flagged. African users’ accounts and funds are without question more readily frozen or blocked.
And the sad, sad irony is that these platforms exist to facilitate payments from one part of the world to another. But these platforms are failing African users – they are failing the very users they exist to serve.
In fairness, it’s not just WorldRemit. It’s PayPal. It’s Coinbase. It’s Revolut. And many others. One user’s tweet about their bad experience invites many more anecdotes from folks around the continent and the diaspora sharing similar stories.
So what’s really the problem here? On one hand, I can’t say for sure – WorldRemit won’t tell me anything because I’m an alleged money launderer. But I have a few guesses.
First, we know that these global fintechs are beholden to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. These regulatory requirements have unintended consequences. For banks, they’re expensive. “American financial institutions spend an estimated $50 billion per year in AML compliance costs,” according to Brookings. Expensive, and not necessarily effective either, “…yet estimates are they catch less than one percent of the estimated $2 trillion in financial crime committed each year.”
This creates two problems. First, this reduces access to financial services, including and especially for the millions of citizens in the developing world who do not have the necessary identity documents or formal addresses to meet verification requirements.
Second, expensive compliance costs impact financial institutions’ approach to risk. A common AML practice is known as “de-risking”, a practice that is, in part, a result of these high costs.
De-risking refers to the large-scale practice of banks terminating relationships with counterparties and classes of customers, and even exiting entire countries or regions in an effort to limit compliance risk and its attendant costs.
Financial institutions have to make a business decision. Is this customer “worth” the cost of compliance? In many cases, they’re not, and particularly when the customers are low margin and presumably lower-income (emphasis mine).
As part of the current cycle financial institutions began employing risk-based principles to re-examine customer relationships, asking whether particular customers generate sufficient income to justify additional compliance investments. Firms undertaking this analysis increasingly have chosen to terminate or restrict business relationships with remittance companies and smaller local banks in certain regions of the world. Those most vulnerable in the de-risking cycle are the low margin customers, not necessarily high-risk, high-value customers. This is because risky customers that generate substantial fees often prove more attractive than less profitable customers with lower risk, even when the high-risk customers require expensive monitoring.
Frustratingly for policy makers, therefore, the victims of de-risking cycles are disproportionately lower income migrant workers attempting to send money to family members in their home countries, as opposed to higher-risk potential bad actors who launder money or finance terror.
Now, the above applies in particular to the global payments system, in which a series of correspondent banks might be used across the markets in which a payment is being made. That exacerbates the problem further because these banks don’t necessarily have any direct relationship with either the sender or the receiver.
But that’s not case with me and my relationship with WorldRemit. They know exactly who I am. They not only have my identity documents but my address, as well. And when I called them (and after they verified my identity over the phone) I offered to provide any additional documentation or information they wanted. I was trying to pay a freelancer for her services – I have an invoice and proof of services delivered. Privacy be damned – I offered to provide confirmation of my banking details, from which the payment was made. I offered to provide proof of funds for my business. Selfies. My Social Security number. A stool sample. I offered to send it all!
I wanted to de-risk myself, but all too often, these global fintechs are doing the de-risking themselves, and in a way that is punitive and discriminatory.
And that’s really what I don’t understand. Global remittance companies know their customers are sending money to and from “riskier” countries. It’s quite literally the entire purpose of their business.
Is the extent to which African users and users in Africa are having their funds frozen and their accounts deleted a KYC/AML regulation problem? Or is it an operations and processes problem, in which these users are not given an opportunity to provide additional information and documentation to assure the payments being made are above board? (Perhaps because these users are not “worth it”.)
If it’s the latter – I am sure that AML regulation and fraud prevention is onerous, but these global fintechs are unquestionably failing their customers and need to improve their processes. And I hope they do, because millions of people across the Global South rely on their services.
As for me, after WorldRemit blocked my account and prevented my contractor from receiving her hard-earned money, I spent the afternoon walking her through how to open up a crypto wallet. For all of my contractors who are comfortable holding crypto or off-ramping into fiat, I will be paying them in stablecoins moving forward. And I’m resolved to help onboard whoever needs help, because no one should have to deal with these challenges simply for trying to send money to a part of the world that the rest of the world considers risky.