Why “account freezing” is a bigger problem for neobanks than for incumbents

CharacteristicsAlternative loansDigital bankSavings and investment

Increasing levels of fraud are being seen for banks and the end result is more legitimate customer accounts being frozen, writes Selin Bucak.

Image source: Photo by Tim Gouw of Pexels

Strict regulatory requirements, a desire to cut costs and a fear of personal liability have left digital banks struggling to solve the problem of bank account closures, which can leave customers without access to critical funds for weeks and years. month.

There have been increasing reports of customers whose bank accounts have been suspended without warning since the start of the pandemic. Some have even banded together to create social media groups to highlight the issue, such as “Monzo stole our money” on Facebook.

Indeed, in the 12 months to September 2021, more than 1,000 people contacted consumer complaint resolution firm Resolver to complain about their accounts being frozen without warning.

In the whole of 2021, the four major digital banks received a total of 1,850 complaints, the bulk of which relate to account freezing. While the number of such complaints has fallen year over year, it’s still high for something that should be a niche issue, said Martyn James, consumer expert at Resolver.

Some customers have gone to court to recover the remaining money in their frozen accounts. Since the start of 2020, there have been 19 county court judgments against Monese and five against Revolut.

Banks say a sharp rise in online fraud and financial crime over the past two years, accelerated by the pandemic, which has increased online commerce, has compounded the problem.

Monese, Revolut and N26 have all said they try to resolve these situations as quickly as possible, but it depends on the specific cases. For example, AML regulations in the UK or National Crime Agency requirements specify that funds must remain frozen for a specific length of time if suspicious reporting activity is filed.

And when it comes to AML regulations, banks can face hefty fines for non-compliance, such as the €4.25 million fine and a customer limit imposed by BaFin on German digital bank N26. . This means that they must be very careful that there are no errors, as this can lead to significant costs.

“To some extent, big banks can see this type of fine as a cost of doing business, they can take a fine of this size, but not digital banks,” said John Burns, technical director of services at payment at Compliancy Services.

Because digital banks are newer and have fewer ongoing customer relationships, they have less information to immediately assess a situation when an unexpected payment or transfer occurs, he added.

Also, under money laundering laws, if suspicious activity is investigated, bank staff are not allowed to tell the customer why they froze their account, which leaves a lot of people frustrated because they don’t know what to do to regain access. If they tell the client, they risk jail time.

“The irony is that it’s something easy to fix, all it takes is a member of staff with the power and authority to look at the account ID and unblock it. But what’s happening here is that bank staff have been undertrained, told they can’t talk to people. We see people whose accounts are frozen because of a £200 transaction. You’re stuck in a situation where you can’t actually solve the problem,” said James from Resolver.

In Burns’ view, there aren’t enough people in the banks who are willing to take a stand and make the decision to release funds.

In addition to the lack of trained staff, James thinks the problem is that digital banks have automated anti-money laundering procedures to cut costs. However, he says, the algorithms lack the “common sense factor”.

This means they end up flagging accounts that shouldn’t be, sometimes with less than £50.

He added: “We are flabbergasted that this is continuing. I spoke to the banks and said what’s the problem here? Some of them seem to deny that it even happens. But it happens… The problem is that banks are torn between very important legislation, AML, and how it is interpreted. On the one hand you have regulators saying you’re not doing enough on money laundering, on the other it’s a mixed message from them saying you’re being too restrictive. Banks are not good at mixed messages.

While digital banks have been the main culprits for account closures, it is now becoming a more widespread problem, with James pointing out that over the past nine months they have also received a growing number of complaints about traditional banks.

Systems Changes

For their part, digital banks are trying to remedy the problem. But with the threat of regulatory fines and even potential jail time hanging over their staff, it’s hard to strike a balance.

N26, for example, said it has increased its investments and strengthened its measures in the areas of AFC and anti-money laundering, in particular by strengthening governance, risk and compliance functions, and is working in working closely with supervisory authorities to prevent problems.

It said it has “heavily invested” in expanding its internal financial crime team and supporting product and technology teams by 150% in 2021. It also plans to expand its business operations department. Last year, the bank pledged to invest more than 25 million euros in the fight against money laundering and to make progress in the fight against online fraud.

Monese has expanded its customer service, anti-money laundering and financial crime teams to more than 100 employees, representing more than a third of the bank’s total workforce.

Elsewhere, Revolut said around a third of its 1,500 financial products and services employees work in the AML and fraud investigation unit. In order to improve the effectiveness of its controls, so that they report more suspicious transactions and have fewer false positives, the group has increased the use of machine learning tools.

A Revolut spokesperson added that at any time a very small number of its 18 million customers worldwide could have their accounts suspended.

Despite all the system updates and the use of artificial intelligence and machine learning, there will always be legitimate customers who get caught on the net where the goal is to stop criminal activity, said a Revolut spokesperson.

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