Off The Rails: Bankrupt Railsr's E-Money Entity Shutdown, Criminal Charges Possible
Off The Rails: Bankrupt Railsr's E-Money Entity Shutdown, Criminal Charges Possible
Prime Trust Shutdown by Regulators, Nevada Passes EWA Licensing Law, Consumer Fintech Consolidation Continues, Fintech Meetup Welcomes Nexus' Sponsors & Attendees
Hey all, Jason here.
For those who were following along on Twitter, my summer roadtrip to France was a success — first long car trip in an all-electric vehicle and with the dog!
It’s hard to believe it’s the end of June already. My favorite part about this time of year, especially in the Netherlands, is how long the days are — you can still catch a bit of daylight til past 10pm.
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Hear From The Fraud Fighters Themselves
Sponsored content: I had the pleasure of attending the launch of Unit21’s Fraud Fighters Manual in New York City last month — and during the event, I had the opportunity to speak with several of the contributors, including: Robert Reynolds (Pinwheel), Alex Faivusovich (Unit21), Kevin Yang (Nibiru Chain), Kenny Grimes (Mercury), and Tanya Corder (Treasury Prime).
Hear about these real-life fraud fighters’ contributions to the book and the importance of having an open, frank discussion about fraud — and, if you haven’t already, download your copy of the book now.
Off The Rails: Regulator Revokes UK BaaS Platform Railsr’s European E-Money License; Criminal Charges Possible
UK-based banking-as-a-service platform Railsr, formerly known as Railsbank, has had a fairly spectacular unraveling. Once valued at nearly $1 billion, the company was sold through a “pre-pack” bankruptcy process earlier this year about $500,000.
But the company’s issues hardly seem to be behind it. Its PayrNet entity, a wholly owned subsidiary that Railsr used to hold its financial services licenses and payment scheme memberships, has had its European e-money license revoked and been forced into bankruptcy amid “serious, systematic and multiple violations” of payments laws and AML/CFT regulations.
Railsr’s PayrNet e-money entity, licensed in Lithuania, exclusively provided services through some 90 intermediaries, distributors, or other legal entities. PayrNet delegated significant responsibilities, including customer onboarding and AML/CFT requirements, to these customer-facing entities.
The company was the fifth largest e-money institution based in the country, with €7.5 billion in revenue in 2022 (though that amounted to just €6.4 in operating income.)
The Bank of Lithuania, the country’s central bank that oversees e-money institutions, issued a scathing statement describing the company’s serious and repeated failures to comply with applicable laws and regulations.
The central bank found that PayrNet:
violated Lithuania’s Law on Electronic Money and Electronic Money Institutions, Law on the Prevention of Money Laundering and Terrorist Financing, and the Law on Payments
did not conduct adequate (or, in some cases, any) due diligence on the intermediaries it worked with
did not control to whom the intermediaries provided services, including how those intermediaries performed money laundering/terrorist financing checks delegating to them
failed to comply with the requirement for periodic training and audits of intermediaries
did not always identify clients (end users), did not properly verify information about clients’ beneficiaries, failed to identify the purpose of clients’ businesses, and engaged with clients at high risk of money laundering/terrorist financing without applying enhanced due diligence
failed to ensure an adequate internal control system, including an IT system capable of collecting and storing relevant data
did not have data on how many clients (end users) used its services; did not control data on payment transactions of end users; and was unable to determine the exact amount of end-user funds
did not perform daily/real-time or look-back transaction monitoring
did not always report suspicious client operations or transactions
tipped-off intermediaries about reported suspicious client transactions, despite a prohibition on doing so
failed to properly safeguard end user funds; instead of keeping funds at a credit institution (bank) or the central bank, PayrNet kept funds at another e-money institution
unilaterally terminated client contracts without informing them in advance and failed to redeem their e-money upon receiving requests to do so
failed to ensure adequate internal controls for the calculation of own fund requirements
failed to comply with mandatory instructions given by the central bank and provided inaccurate and incomplete information to the supervisory authority
Ultimately, the Lithuanian central bank found that PayrNet’s liabilities exceed its assets and that there is no evidence its financial situation will change in the near future.
Finding PayrNet to be insolvent, the central bank has initiated bankruptcy proceedings. PayrNet can no longer provide financial services and must return client funds within a prescribed timeframe.
The central bank also referred the matter to law enforcement to assess if criminal offenses have been committed.
Fintech Meetup Continues to Disrupt Fintech Events: Fintech Nexus Event To Close
I’ve had the pleasure of partnering with and attending Fintech Meetup since it launched its first event in 2021 (how long ago that feels!) A big part of my job is attending events all over the world. But Fintech Meetup approaches events in a radically different way.
Fintech Meetup focuses on revolutionizing how fintech actually does business together. Frankly, this is exactly what we need right now, particularly given the challenges and opportunities our industry faces.
The heart of Fintech Meetup is their meetings program — “Meetup,” which will facilitate 50,000+ 1-1 meetings, and elevates the most impactful part of any conference experience: actionable face-to-face connections.
And now Fintech Meetup is set to be even bigger and better following an agreement with Fintech Nexus, which will discontinue its Spring event and transition its sponsors, exhibitors, and attendees to Fintech Meetup. Going forwards, Fintech Nexus will focus on developing and growing its publishing business which makes Fintech Meetup the second largest US fintech industry show.
Jon Lear, President of Fintech Meetup, said of the news:
“We’re thrilled to welcome Fintech Nexus sponsors, exhibitors and attendees to the best fintech show of the year and can’t wait for everyone to experience Fintech Meetup 2024. Fintech Meetup is the highest ROI fintech event in the industry, and we know everyone will love it!”
A big congrats to the teams at Fintech Meetup and Fintech Nexus! I’m looking forward to attending and speaking at Fintech Meetup again next March.
Crypto “On Ramp” Prime Trust Forced To Shutdown Amid “Shortfall” Of Customer Funds
Prime Trust, a Nevada-chartered trust company, received a cease and desist order from the state regulator after an acquisition by crypto custody firm BitGo fell through.
The company, which describes itself as “financial infrastructure for crypto,” served as a key link for crypto companies to access the traditional financial ecosystem. It functioned as a “crypto on/off ramp,” allowing crypto exchanges to accept USD deposits from users and, vice vers, enabling users to withdraw funds from exchanges and back into USD.
Prime Trust also offered asset custody, wealth management, payments, and stablecoin-related capabilities.
According to the cease and desist order, Nevada’s Department of Business and Industry’s Financial Institutions Division began a safety and soundness examination of Prime Trust on November 7, 2022.
That examination remains open and its initial scope has been expanded, as the regulator found it necessary to monitor Prime Trust’s solvency.
Per Prime Trust’s call report filing for the period ending March 31, 2023, the company reported negative $12 million in stockholders’ equity — indicating a substantially distressed financial position and in violation of licensing requirements to hold at least $1 million in equity.
Last week, the company’s issues came to a head, when it was unable to fulfill customer withdrawal requests, due to a “shortfall of customer funds.”
Nevada also found that Prime Trust “has materially and willfully breached its fiduciary duties to customers by failing to safeguard assets under its custody and is unable to meet all customer disbursement requests.”
As a result of the shortfall, state regulators found that the company is incapable of operating in a safe and sound manner and thus issued the order to cease and desist operating.
It’s unclear if the failure to safeguard customer funds and the resulting “shortfall” in funds is due to intentional fraud, incompetence, or both.
Nevada Passes First Earned Wage Access Licensing Law
Earlier this month, Nevada became the first state to pass a law requiring licensing for earned wage access (EWA) companies — including both “employer-integrated” and “direct-to-consumer” models.
The law imposes a number of requirements on licensees, including:
Providers may not use credit reports or credit scores to determine users’ ability to use their services
Providers must give clear disclosures, including of all fees
Providers must identify at least one option for users to obtain EWA services at no cost
For those providers accepting “tips,” (1) they must make clear that such payments do not go to any specific employee of the provider; and (2) provide an option for users to select zero as a tip amount
For employer-integrated providers, they are not permitted to share any “tips” or fees with the user’s employer
Providers are not permitted to charge late fees
If providers cause users to incur overdraft or NSF fees, it must reimburse them in certain circumstances
Providers may not (1) report users to credit bureaus; (2) use a third-party debt collector; (3) sell or assign a user’s debt to a third-party collector or debt buyer; (4) sue a user for non-payment
The law will come into effect as of July 1, 2024, which should give EWA providers ample time to comply with its measures.
Consumer Fintech Consolidation Continues: X1, Envel, Finch
Last week was a busy one for fintech M&A news.
The biggest deal of the week was Robinhood’s acquisition of credit card startup X1 for $95 million. The company had raised a total of $62 million from VCs that included Spark Capital, FPV, Craft Ventures, Soma Capital, and electronic music group The Chainsmokers, though its most recent valuation isn’t known.
X1, which dubiously claims to be “the smartest credit card ever made,” touts features like a 17 gram stainless steel card and points that could be redeemed to buy stocks and ETFs. X1 partners with bank partner Coastal Community to issue its card.
Envel, a neobank whose main feature seems to have been “envelopes” for organizing funds, was acquired by BaaS platform Bmtx (formerly known as BankMobile). Envel partnered with nbkc for its offering. The company had raised just shy of $15 million in VC funding. The Bmtx deal came after negotiations with an alternate acquirer fell through. Bmtx acquired Envel out of liquidation, with Envel shareholders getting wiped out in the process.
Finally, Finch, a spending account and investing app, sold to price comparison site Finder. Finch partnered with Evolve Bank and Trust via BaaS platform Synapse. Finch had raised a modest $3.6 million in seed financing from Mendoza Ventures and Techstars. Terms of the deal were not disclosed.
Other Good Reads
Report: Banking And Credit Access In The Southern Region of the US (CFPB)
A Review Of Fintech Takes’ Theories (Fintech Takes)
Envisioning the Future of Money Movement (This Week In Fintech)
The End of Innovation (As A Management Fad) (Ron Shevlin/Forbes)
Listen: The Evolution and Future of Banking-as-a-Service (Banking Transformed Podcast)
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