By Selin Bucak on Monday 14 March 2022
Increasing amounts levels of fraud are being seen for banks and the end result is more and more legitimate customer accounts being frozen, writes Selin Bucak.
Strict regulatory requirements, a desire to keep costs down and a fear of personal liability has left digital banks struggling to address the issue of bank account closures, which can leave customers without access to critical funds for weeks and months.
There have been increasing reports from customers who have had their bank accounts suspended without warning since the start of the pandemic. Some have even banded together to set up groups on social media to highlight the problem, 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 company Resolver to complain about their accounts being frozen without warning.
In all of 2021, the top four digital banks have received a total of 1,850 complaints, with the bulk of this relating to account freezing. While the number of such complaints have gone down year-on year, it is still high for something that should be a niche issue, said Martyn James, consumer expert at Resolver.
The banks say that a sharp increase in online fraud and financial crime over the last two years, accelerated by the pandemic, which has increased online trading, has made the problem worse.
Monese, Revolut and N26, all said they try to resolve such situations as quickly as possible, however, it depends on specific cases. For example, AML regulations in the UK or National Crime Agency requirements specify that funds must remain frozen for a specific duration if a suspicious report activity is filed.
And when it comes to AML regulations, banks can face hefty fines if there are any failings, such as the €4.25m fine and a customer limit imposed by BaFin on German digital bank N26. This means they have to be very careful there aren’t any mistakes as it can result in significant costs.
“To an extent, the big banks can see that sort of fine as being a cost of doing business, they can take a fine of that size, but not the digital banks” said John Burns, payment services technical director at Compliancy Services.
Because digital banks are newer and have less of an ongoing relationship with the client, they have less information to immediately assess a situation when an unexpected payment or transfer occurs, he added.
In addition, under money laundering laws if suspicious activities are being investigated, bank staff are not allowed to tell the customer why they have frozen their account, which is leaving many frustrated, as they don’t know what to do to regain access. If they do tell the customer, they could be facing prison.
“The irony is it’s something easy to sort out, it just needs a member of staff with the power and authority to look at the account identify and unfreeze. But what’s happening here is bank staff have been undertrained, they’ve been told you can’t talk to people. We’re seeing people who have accounts frozen because of a £200 transaction. You’re stuck in a situation where you can’t actually solve the problem,” said James at Resolver.
In Burns’ opinion, there aren’t enough people in the banks who are willing to take a view and make the decision to release funds.
In addition to the lack of trained staff, James believes the issue is that digital banks have automated anti-money laundering procedures to keep their costs down. However, he says, algorithms don’t have the “common sense factor”.
This means they end up flagging accounts that should not be, sometimes with less than £50.
He added: “We are flabbergasted this is still going on. I’ve spoken to the banks and said what is the problem here? Some of them seem to be in denial this is even happening. But it is happening…The problem is banks are torn between a very important legislation, AML, and how it’s being interpreted. On the one hand, you have regulators saying you’re not doing enough on money laundering, on the other hand, it’s the mixed message of them saying you’re being too restrictive. Banks are not good with mixed messages.”
While digital banks have been the main culprits of account closures, this is now becoming a more widespread problem, with James pointing out that in the last nine months they have been receiving an increasing number of complaints regarding traditional banks as well.
Changes to systems
For their part, digital banks are trying to address the problem. But with the threat of regulatory fines and even potential jail time hanging over their personnel, it is tough to strike a balance.
N26, for example, said it increased its investment and strengthened its measures in the areas of AFC and anti-money laundering, including by strengthening governance, risk and compliance functions, and is working closely with supervisory authorities to prevent issues.
It said it has “invested heavily” in expanding its in-house anti-financial crime team and supporting teams in the product and tech area by 150 per cent in 2021. It plans to also expand its business operations department. Last year, the bank committed to investing more than €25m in combating money laundering and making progress in curbing online fraud.
Monese has expanded its customer service, anti-money laundering and financial crime teams to more than 100 employees, which accounts for over one-third of the bank’s total headcount.
Elsewhere, Revolut said approximately a third of its 1,500 financial product and services staff work in the AML and fraud investigation unit. In order to improve the effectiveness of its controls, so they flag 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 clients globally may have their account suspended.
Despite all the updates to the systems, and the use of artificial intelligence and machine learning, there will always be some legitimate customers who are getting caught in the net where the goal is to stop criminal activity, a Revolut spokesperson said.