With the help of globalisation and digitisation, the world is getting smaller. Companies can operate internationally with offices and business networks in the far reaches of the globe. Yet, as more and more businesses are moving online, their physical existence in the city is being compromised. Thus, bank account opening is essential for companies to establish their physical presence as they expand overseas.
A bank account acts as an identification card of a company, helping the company to mark its presence in a foreign city or country. Moreover, it also brings great convenience to the process of collecting money from clients and payments to vendors. However, as the financial regulatory framework tightens across the world, there are more and more regulations being imposed on bank account openings over the past few years, making it extremely difficult for companies, especially foreign companies to set up bank accounts.
Recognising this difficulty, the question that needs answering now is how worthwhile is it for bank institutions to continue their strict regulation on the opening of a bank account.
Combo Threats from Crimes and Virus
As the world enters the digital age, economic white-collar crime has become more and more prominent, with 72% of the companies reported to be victims of white-collar crimes globally in 2019, an increased from 47% the previous year. Ranging from cross border transactions, complex structuring to the emergence of cryptocurrencies, white-collar crime has evolved and becomes more sophisticated due to globalisation and increased connectivity over the years. The rise of such crimes has thus made it extremely difficult for banks to conduct their compliance checks, as they are borderless, and often leave little to no track behind.
Among a variety of economic white-collar crimes, money laundering, sanctions violations and tax evasion have been the top crimes in the financial community, with much blame apportioned to the banks for assisting in these activities. Such activities have caused banking institutions to suffer losses due to heavy fines and settlements. For example, the BNP Paribas fine of $8.9 billion in 2015 for violating sanctions in Sudan, Cuba and Iran, or the $1.9 billion penalties incurred by HSBC over money laundering in 2012. These, and many other similar cases, are causing a reaction in the banking industry where heavier scrutiny is placed on any existing and new accounts for fear of onboarding a toxic company that may result in severe repercussions.
Moreover, the tightening of regulations due to the hidden menace of white-collar crimes has brought much inconvenience during the coronavirus pandemic. With the threat of possible second or third waves of coronavirus outbreak around the world, travelling and groups gathering are still being ban in most of the countries. This has thus hindered the Know Your Client (KYC) processes of the banks, making face to face verification to be impossible.
Yet, many banks are still reluctant to change their policies according to the changing norm in the face of the coronavirus outbreak for the fear of more crimes being committed in this unprecedented time. Thus, resulting in many companies, especially those who are venturing overseas, to fail in setting up a bank account as KYC is one of the fundamental requirements to open a bank account.
Profit VS Necessity: SMEs
Besides the threats of crimes, profit is also another factor that has hindered the opening of a bank account. As an institution that aims to earn, banks usually consider profits as part of the requirements to approve a bank account opening. Unfortunately, this means that some companies, mainly Small and Medium Enterprises (SMEs), will be denied to open a bank account due to their innovative and experiential nature.
With a novel and high-risk business model, SMEs usually will have to undergo a series of comprehensive and detailed background checks by the banks before getting the approval of opening a bank account opening. However, enhanced checks come with higher costs due to increased time and manpower, making SMEs’ bank accounts unprofitable for banks to hold and maintain, which in turn, results in rejection by the banks.
This is ironic as SMEs are the companies that require bank account opening the most to facilitate their business expansion. The high probability of rejection by the banks will not only deny SMEs the access to expand their business overseas, but it will also impact the financial landscape in the long run as SMEs collectively form a substantial volume of the economy. As such, it is essential for banking institutions to make appropriate adjustments to the rules and regulations for companies to enjoy banking services before is too late.
Embrace the Cryptocurrency Space
While strict regulations for bank account opening are essential to curb potential crimes and problems from occurring, banking institutions will also have to be more receptive to new changes, especially in the post coronavirus world where new norms will remain and dominate the financial landscape.
One of the examples would be the emergence of cryptocurrency space. As one of the emerging FinTech in the financial world, cryptocurrencies startups are shunned like a plague by banks and regulators since its initial appearance, forcing the FinTech industry underground. This has thus conveniently allowed the industry to be used as a conduit to conduct illicit activities due to the lack of oversight, leading it to be deemed as a highly risky industry.
Though, in recent years, many countries have been actively regulating cryptocurrency-related activities. For example, the Monetary Authority of Singapore (MAS) has granted a temporary exemption from holding a license to several cryptocurrency companies under the new Payment Services Act, as well as Germany’s Federal Finacial Supervisory Authority (BaFin) has published a series of guidelines on how companies can apply for its authorization to offer a crypto custody services, reflecting the gradual acceptance of the authorities regarding cryptocurrency-related financial services. Yet, companies engaging in cryptocurrencies or its peripheral industries still largely remain as a high-risk business by many banks and regulators, which in turn, results in their request to open a corporate bank account to be rejected.
To alleviate the bank account opening problem, allowing SMEs to access the required banking services, banks should identify key industries that are popular amongst SMEs and create a specialist team to advise the frontline bankers and compliance officers on the intricacies of those specific industries. With this, it will allow frontline bankers and regulators to have a deeper understanding of the importance and mechanism behind those selected industries. Thus, allowing them to make a more informed decision.
The Emergence of E-Banking and E-Wallet
Lastly, the emergence of e-banking and e-wallet solutions serves as a good go-between the banks and SMEs, helping to fill up gaps that banks may not be prepared to or want to be involved indirectly. This has thus given rise to the FinTech industry, posing a greater challenge to the survival of traditional banks.
Yet, even though the advancement of e-banking and e-wallet serves as good alternative banking solutions to SMEs, the former solutions still rely heavily on the traditional banking industry, where banks act as a custodian of the funds and international funds transfer facilities.
As such, banks will still need to come out of their comfort zones and be more open to new ideas. It is also important for banks to trust and accept companies engaging in providing e-banking and e-wallet solutions as a partner rather than as a competitor, to adapt and survive in the new economic environment.
Is It Worthwhile To be Strict?
Rather than viewing the regulation as being strict and rigid, we must recognise the reason to impose tight regulations on bank account opening and embrace the challenge that comes with it.
That said, overly strict regulation and supervision will be at the expense of the companies’ business growth and the economic growth of each country. Thus, a multi-lateral collaboration is required between banks, regulators, and company owners.
While it is the responsibility of business owners and banks to ensure that they stay away from any white-collar crimes related activities, regulators will also need to be realistic about the helping promote a conducive business environment, and share the responsibilities with the banks.
Instead of firmly imposing strict regulations with no intention of compromising, banks and regulators will have to be more open-minded to keep up with the changing times. Insisting on face to face KYCs is a good case in point. A compromise in accepting secure video calls for KYC is a feasible solution, whilst ensuring that necessary checks are in place.
In conclusion, rather than having a blanket rule, a more consultative approach is needed to accommodate and provide a holistic and inclusive economic environment where the interest of all its stakeholders are being taken care of.
Singapore Allows Crypto Companies to Operate Without a License for 6 Months, Bitcoin.com