Four Days Later, African Startups Stay Blocked

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Spleet Raises $625k Pre-seed Funding Round
Spleet Raises $625k Pre-seed Funding Round

It’s another Friday and you know what that means: No, not “cheers to the weekend” Imagine waking up to a sudden notification that the very important U.S. business account you use to pay salaries, settle various bills, send and receive wires, and make other vital procurements has been frozen indefinitely.

Also, imagine finding out soon after that the same issue is affecting the accounts of other businesses that share one key trait with yours: made in Africa.

Just as February drew to a close, it came to light that San Francisco-based Mercury Bank, the self-styled bank for startups, blocked several accounts tied to a hundred or more startups in Africa.

Why?

Mercury’s explanations have been mostly vague – saying it noticed some “unusual activity” and “linked activity” on the accounts which are now undergoing review by its compliance team.

But what Mercury did say only fed curiosity into what it didn’t say: that all the affected accounts seem to be linked by the singular fact that they are held by startups built by Africans operating in Africa.

Also, the manner of the account restrictions – very sudden and without proper communication – channels the discourteous manner in which African customers have been historically treated by global financial institutions, with PayPal and Coinbase being among the villains in that category for many Africans.

We’re four days into the shutout, and nothing has changed – the accounts are still frozen and some persons familiar with the workings of the financial system have expressed fears that the freeze might actually become a permanent blockage and the funds held by African startups in those Mercury accounts could be seized for a long time.

The startups affected – from established names to lesser-known upstarts – are operating on countries such as Nigeria, Ghana, Zambia, Sierra Leone, etc.

Wondering why African startups bank with Mercury?

It’s almost natural to wonder why a startup operating in Accra, Nairobi, Lagos, or Cape Town would be reliant on a neobank that only kicked off in October 2019, sitting in an entirely different continent, whose officials they probably never met or don’t even know.

The simple answer is that most African startups are actually U.S. companies because it’s the proven route for raising money or accessing valuable, otherwise out-of-reach resources/networks.

Many investors will never touch a non-U.S. company, and much of the money fuelling African tech comes from outside the continent – from investors who insist on investing in only U.S. companies.

The investors typically require this because of capital control issues and the difficulty of moving or repatriating funds from certain jurisdictions. Startups also adopt this structure to sidestep economic/financial policy obstacles in their locality and to make themselves globally competitive.

Hence, many African startups incorporate in the US as it makes it easier to raise money and move money. But setting up bank accounts in the U.S., while not being American or based in Africa, can be quite onerous and expensive, especially with traditional banks.

Hence, Mercury stepped in to make it possible for non-U.S. businesses to open a US bank account without actually being in the US. The ease of its processes and its low fees sort of made it a favourite among African founders. But it seems something has gone terribly awry as an estimated 100+ African business accounts are now suspended.

Where to from here?

After the initial outrage from tech industry stakeholders in Africa, Mercury communicated its intention to resolve the issue but the words are yet to be matched with action. The furore has also died down owing to the apparent helplessness of the situation.

Whether the issue is resolved or not, it can’t be ignored that the fact that Mercury can suddenly block the accounts of so many African startups at the same time indicates a bigger problem that has always been there but only just begun to rear its head.

The corporate governance of African tech’s most prized assets cannot be at the whims of an entity that is not really incentivised to care and can switch up at any time.

While setting up U.S. holding companies is deemed necessary at this point in time, it ought to be seen as a temporary fix and a more reliable long-term solution needs to be sought after. Interestingly, some local founders appear to already be on to something on the solutions front.