EXPOSED Why internet ‘banks’ can’t always be trusted
Dozens of e-money firms offer banking services, but don’t have the same legal protection as banks. As Barry Collins discovers, millions of vulnerable customers are putting their money at risk
It’s a warm Friday night in late
June 2020 and Katie Shadwell is wondering what to make her kids for tea. Her benefits payment from the Department of Work and Pensions (DWP) should have landed in her account by now so she can buy enough food to get her and two children through the weekend at least.
She avoids the queues in the local supermarket and uses the automatic tills instead. She runs through about £20 worth of groceries, including a couple of ice creams that she promised the kids if they were good – a rare treat – and pays with her card. Payment declined. Pesky auto tills.
Katie gathers up her shopping, queues for ten minutes with the melting ice creams to reach the only till being manned by a human being, and having rescanned the shopping again, hands her card over to pay. Payment declined. The supermarket assistant can’t tell her why, only that she can’t leave the store with her shopping without handing over £20. That’s money Katie doesn’t have.
She leaves the supermarket with two crying children, fighting back the tears herself until she can get out of the shop and work out what’s going on. She fires up the Pockit app on her smartphone, praying she’s got enough data left to find out what’s going on. Her benefits payment hasn’t dropped. Her balance is near zero. Her app is showing strange error messages.
She gets back home with two hot and hungry children and manages to rustle up something from the scraps in the kitchen that passes for tea. She doesn’t eat herself. Instead, she spends the rest of the evening trying to reach Pockit’s customer services to find out why her payments haven’t arrived. The payments she needs to feed her kids.
Katie won’t be getting any money that weekend. Nor will millions of other e-money account holders, who have all had their accounts frozen as a result of the Wirecard scandal. The German firm has become embroiled in one of the biggest financial frauds ever and the UK’s Financial Conduct Authority (FCA) has ordered the suspension of operations at Wirecard’s UK subsidiary, Wirecard Card Solutions (WCS). WCS provides the payment processing for dozens of e-money services including Pockit, Curve, Payoneer, CardOneMoney and others. Accounts are effectively frozen. In Bristol, Peter Hegarty has just filled up his car with petrol and goes to the kiosk to pay. His Pockit card, like Katie’s, is declined. With no alternative means to pay, the police are called and Peter – who is autistic – suffers the embarrassment of having to plead with officers that he didn’t intend to fill his car without having the money to pay. “The police still think I didn’t
intend to pay as [the card] kept saying not authorised and in their book that means I don’t have it,” he tells me on the Saturday morning, having just read my online news report about how the Wirecard scandal has crippled all these banking services that aren’t really banks.
Peter’s anxiety is turned up a notch further when he reads the
FCA’s Q&A on the Wirecard suspension and finds out that the funds in his Pockit account aren’t protected in the same way they would be if they were in Barclays, HSBC or any other high-street bank. The Financial Services Compensation Scheme (FSCS), which guarantees deposits of up to £85,000 if a bank fails, “only applies to certain types of activity which does not include issuing electronic money or payment services”. The e-money services are meant to keep customer funds in safeguarded accounts, and Pockit is among those that issue a statement over the weekend assuring customers their money is indeed safe, but as we’ll come to shortly, many e-money providers don’t have adequate safeguarding in place – even though it’s an FCA requirement.
By late Monday afternoon, the FCA relents and unfreezes Wirecard’s UK operations. “Customers should now or very shortly be able to use their cards as usual,” the FCA’s updated Q&A relates, but it’s not that simple for Katie. “Pockit are telling me that any declined payments will take five days to bounce, another payment yesterday has bounced too, [that] leaves me almost an extra week at least with absolutely nothing,” she tells me on the following Thursday.
“So many of us are still left with nothing,” she adds. “They say to call DWP for support, but the only support they offer is to resend bounced payments once they are returned. That’s days away for most of us.
“People are taking loans out against items which cost interest to get back, at no point will we be compensated for the further money we will have lost on that, just so we could get some money for our families. It’s left us desperate. I don’t have family support, I don’t have anyone close by in the area who I know as I just moved here. I’m left with nothing and no one to turn to.”
A Pockit spokesperson said: “The Wirecard collapse, combined with the ongoing, disruptive effects of the pandemic (the switch to homeworking, general disruption to business operations) have placed unprecedented demands on our customer services teams. While we always endeavour to respond to our customer enquiries in a timely manner, we acknowledge that sometimes our standards fall short. We have redoubled our efforts and recently invested in our customer service teams so that we might better serve our growing base of customers.”
IT’S LEFT US DESPERATE. I DON’T HAVE FAMILY SUPPORT, I DON’T HAVE ANYONE CLOSE BY IN THE AREA WHO I KNOW
HOW DID WE GET HERE?
For millions of people such as Katie, services such as Pockit, CardOneMoney and U Account are the closest thing they have to a bank. Indeed, it’s not the least bit difficult to see why people might think they are banks, as the services they offer are very similar to those you might seek at NatWest, Halifax or other well-known high-street names.
“The simple, easy current account,” boasts the Pockit homepage in big bold lettering, at the time of writing, with an “as seen on the BBC” logo on the graphic to lend it further credibility. You can order a Pockit card with the familiar Mastercard logo, “manage your money” with the Pockit app and “save on bills with Direct Debits”. It’s only when you scroll down right to the footer of the site, in small lettering, that you see the message: “Pockit is a prepaid account, not a bank.”
A Pockit spokesperson insisted the company was not trying to portray itself as a bank. “Pockit states very clearly on our website homepage and in our terms and conditions that ‘Pockit is a prepaid account, not a bank. Prepaid accounts are not covered by the Financial Services Compensation Scheme (FSCS).’ Pockit customers are required to read these terms and conditions carefully before activating their Pockit card for the first time.”
Pockit is by no means alone in offering bank-like products. CardOneMoney’s homepage invites you to “apply for a CardOneMoney current account”, claiming “you could have your new sort code and account number in seconds”. U Account’s homepage invites visitors to “get your wages or benefits paid directly into your U Account, receive BACS and Faster Payments, make instant payments out, and set up Direct Debits or standing orders.
“We’ve got all the bases covered,” U Account adds.
Both CardOneMoney and U Account carry similar disclaimers in the footer, stating they are not banks. But if it talks like a bank and behaves like a bank, could consumers be forgiven for thinking they’re dealing with a bank? It’s a problem, according to Andrea Dunlop, chair of the Electronic Payments Association (EPA) advisory board.
“It’s not always clear to consumers with some of these products,” she said of the distinction between bank and non-bank, adding that it’s something that the EPA has raised with the regulator. “There’s been some work done to try and improve that, but is it where it should be? I think we could be doing better as an industry to make it very clear.”
If you were an “average consumer” and not “from a financial services background and understood the regulation and the laws around this, I think you would probably assume you were well protected,” Dunlop added.
SAFEGUARDING ACCOUNTS
One of the ways in which authorised payment and e-money institutions are meant to protect customers’ money is via the use of safeguarded accounts. The FCA insists that “authorised payment institutions (APIs) and EMIs [electronic money institutions] must have appropriate and well-managed safeguarding arrangements so that, if a firm becomes insolvent, customers’ funds are returned in a timely and orderly way”.
In effect, that means customer funds should be held in a separate bank account that’s “managed on a day-to-day basis”, so that if the e-money firm goes bust, customers get the vast bulk of their money back (admin/insolvency costs would seep away some of the safeguarded funds).
The safeguarding policy was set to be stress-tested in summer 2020, when the FCA suspended Wirecard’s UK operations and millions of account holders found they couldn’t access funds. In the end, the FCA lifted the block on WCS and money slowly started flowing again, but had the
IF YOU WERE AN AVERAGE CONSUMER, I THINK YOU WOULD PROBABLY ASSUME YOU WERE WELL PROTECTED
e-money firms been forced to rely on those safeguarded funds, it seems many of them wouldn’t have been able to lay their hands on the money.
An FCA review “found widespread issues with the way firms safeguard customer funds”, with the regulator finding that firms were “either not holding appropriate safeguarding accounts” or that there was “a lack of clear records to evidence the relevant funds held and that appropriate reconciliations have been undertaken to check this amount”. In other words, customers’ money was not necessarily safeguarded at all.
The EPA’s Dunlop has further concerns over safeguarding, namely where those safeguarded accounts actually reside. “I’m guessing most British consumers would assume that if you put your money into one of the well-known fintechs, your money’s held in a UK bank account,” she said. “The reality is there will be many fintechs that can’t get a UK bank account, and so those funds will be held in any OECD country.”
The Wirecard fraud was exposed when money supposedly held in foreign bank accounts was shown to not actually exist. Dunlop fears British fintech customers could be in a similar position if one of those companies were to go bust. “The UK banks are not obliged to give bank accounts to fintechs here in the UK, and it’s terribly hard if you’re a regulated business to get these accounts, which then forces the situation where the money is held in other countries. When a failure happens… which is what happened with Wirecard, you’re waiting for funds to be repatriated to the UK before they can be pushed out to consumers.”
Fears over safeguarding failures become yet more worrying when you
A PROBE FOUND THAT SOME OF THE E-MONEY FIRMS COULDN’T EVEN WORK OUT HOW MUCH MONEY THEY HAD
realise that a recent FCA probe found that some of the e-money firms couldn’t even work out how much money they had on their books and were taking financial gambles. “During our recent supervisory engagement with the sector, we found several firms had calculated their own funds requirement incorrectly and others with inadequate governance and controls to manage prudential risk appropriately,” the FCA stated in a warning letter to the payment firms, which came just days after the Wirecard scandal emerged.
Dunlop says the FCA’s probe served as a wake-up call for the industry and has helped weed out some of the worst offenders. “We have seen some companies who have failed the [FCA] audit and been picked up lose licences and certainly be penalised,” Dunlop said. “There are good fintechs out there.”
It would indeed be unfair to tar the whole fintech industry with the same brush. After all, it’s not as if traditional banking has a blemishfree history. “The bank risks with your money,” said Boris Dyakonov, co-founder and co-CEO of Anna Money, a fintech that provides business accounts. “That’s why they have the capital requirements, that’s why they can give loans, that’s why they can pay you [interest] on your current accounts, savings accounts.
THE INDUSTRY HAS ERUPTED WITH A SERIES OF TANGLED AND OFTEN INVISIBLE LINKS BETWEEN COMPANIES
PEOPLE CAN BE LEFT IN FINANCIAL STRIFE IF DENIED ACCESS TO THEIR MONEY FOR EVEN A FEW DAYS
“Regulators all over the world, and obviously in the UK, realised that many people just don’t need that. And that’s how historically prepaid cards came about. With prepaid cards it’s really simple, you put £100 in, you receive a card with £100 on it. No risk involved, except an operational one.”
HELPING THE “U N B A N K E D”?
There is also something to be said for the fintech firms throwing a lifeline to the “unbanked”, people or small businesses who might otherwise struggle to get a regular bank account because of a poor credit history or because they’ve only just moved to the UK and don’t have the reams of utility bills that conventional banks demand before opening accounts.
“When banks open an account, they normally assume that they want to give this person a loan,” said Dyakonov. “They want the account to be opened with a credit limit immediately, but that means you are very strict to who you let in. Even if it’s a current account, they can go into a minus, into a credit, they can go overdrawn. They would pretty much on purpose let people go overdrawn and then charge whatever the charge might be, and for some banks that was a huge chunk of revenue.
“That means they would not let everybody in,” he added. “Why would you want to if part of your business model is to let honest people get overdrawn and fine them for that?”
Pockit is equally impassioned about serving those who are shunned by the high-street banks, with a spokesperson claiming that the company is
“focused on financially underserved, low income and unbanked consumers in the UK”.
“We believe that this group of consumers deserve the same products/services with great user experiences – just like more affluent consumer groups,” the spokesperson added. “We are dedicated to delivering that equality by leveraging technology and data to reduce the poverty premium that exists for the bottom half of society.”
Yet, while it’s positive that someone is serving those who can’t get through the door at high-street banks, these are also the people – such as Katie and Peter – who are the most vulnerable when things go wrong. People who live from hand-to-mouth and who can be in serious financial strife if denied access to their money for even a few days.
Is the regulator worried that e-money firms are targeting this
susceptible community? “Protecting vulnerable consumers and ensuring they are treated fairly by firms that we regulate (including EMIs) remains a key priority for the FCA,” a spokesperson said. “We are currently consulting with the industry around our expectations in this area. However, where we identify instances that firms are failing to meet our expectations in this area (including in relation to their marketing, sales and post sales activity), we will take appropriate action.”
That action might come too late for some customers, such as Peter, who wrote to me the week before Christmas. He’s got £367 of Universal Credit in his Pockit account, but he can’t access it because there’s a fault on his card and he can’t get a new one, because he’s now homeless and they won’t send a new card to a “care of” address for security reasons. “I give up,” he writes. “I used every ounce of credit I had to try contacting them.
“I used to be a successful man, but extreme mental illness, Asperger’s and a breakdown meant I lost everything. I live in an old car. I have nothing. No access to my benefits and no one care s.”
Some names have been changed in this article.