Chocolate Finance instant withdrawal issues linked to miles reward option for bill payments, says CEO

SINGAPORE – The high demand for instant withdrawals from Chocolate Finance was linked to a miles reward programme which debit card holders were maximising by making huge payments on AXS machines, said the financial services firm on March 11.

Its founder and chief executive Walter de Oude, speaking to The Straits Times, said this made the option unsustainable, and the firm disabled the option to make AXS payments with the Chocolate Visa Card on March 5 while keeping the two-miles-per-dollar reward for other categories.

When Chocolate Finance launched its partnership with HeyMax on Feb 11, customers could earn two miles per dollar on virtually everything, even on transactions commonly excluded in similar reward programmes, such as charitable donations, education, insurance premiums, utilities and AXS transactions.

“Singaporean customers were very, very smart and managed to maximise the system, which kind of skewed the programme and, therefore, we had to correct and stop the AXS piece,” said Mr de Oude.

He had said via LinkedIn on March 10 that the programme worked brilliantly for customer acquisition. However, bill payments, especially through AXS, surged far beyond expectations, making the programme unsustainable.

“If there are areas or gaps where we find that continued activity in a certain way leads to unsustainability, then we just course-correct to make it sustainable. And that’s exactly what happened here,” he added.

When asked if the firm plans to reinstate AXS transactions, he said: “Whether or not we bring AXS back on, we will have to do more work on that and see. But what we won’t be able to do is to do it in a way which is not sustainable.”

Mr Zennon Kapron, a fintech industry analyst, said the tie-up with HeyMax was more popular than Chocolate Finance had expected, leading to more usage of the debit card and, hence, demand for instant withdrawals.

The firm said it did not communicate the move to disable its debit card from AXS properly to customers, leading many to withdraw their funds fearing liquidity issues.

Citing high demand, Chocolate Finance suspended instant withdrawals on March 10. The firm said the pause is “not a liquidity issue, but a matter of managing our increased transaction volume”.

Chocolate Finance operates under Chocfin, which has a capital market services licence regulated by the Monetary Authority of Singapore. This means that Chocfin is required to segregate customers’ monies from its own monies and place customers’ monies under independent custody. Funds deposited with Chocolate Finance are held separately by custodians – HSBC and State Street.

Chocolate Finance does not take customers’ monies as it is not a bank, said Mr de Oude, adding that it acts like an asset manager which directs how the money is invested.

To facilitate instant withdrawals, Chocolate Finance draws from its own liquidity pool, he said. The firm declined to specify information on the size or source of the liquidity pool.

Chocolate Finance fronts the cash before receiving settlements two days after the transactions. A withdrawal spike can deplete its liquidity buffers, requiring a temporary pause, he said.

It counts Peak XV (previously Sequoia), Prosus and partners of DST Global among its investors.

When there was a spike in withdrawals, the firm had to revert to the ordinary way that funds work, which is on a three- to five-day withdrawal cycle, said Mr de Oude. In more unique cases, it can take up to 10 days, he added.

Mr Kapron said if the firm is able to service all withdrawal requests within three to five days, it does not have a liquidity issue.

Investment platform StashAway said that for its cash management solution, StashAway Simple, withdrawals typically take one to three business days, which account for the time needed to process the transaction and liquidate the underlying money market funds.

Mr Michele Ferrario, co-founder and CEO of StashAway, said company funds are never involved in the withdrawal process, so the firm is able to process transactions as usual, even if there are higher-than-usual withdrawal requests.

On when Chocolate Finance will reinstate instant withdrawals, Mr de Oude said it will do so “when the market settles down”. The firm said it is unable to commit to a timeline at this point.

“As customers start to receive their withdrawal proceeds, in the next coming days, for those that have selected to withdraw, they will see that it is working as it’s supposed to do, and once that’s back, we can then reinstate the (instant) liquidity programme.”