[SINGAPORE] Financial services firm Chocolate Finance on Monday (Mar 10) temporarily suspended instant withdrawals due to “high demand”. A notice on its mobile app that the platform was experiencing an unusually high volume of withdrawal requests quickly went viral among the online community, raising concerns among investors.
The firm said in a press statement on Monday that liquidity issues were not the reason behind the pause in instant withdrawals. Instead, it is a “matter of managing increased transaction volumes”.
The Business Times explains what Chocolate Finance is, how it generates returns, whether it is licensed by the Monetary Authority of Singapore (MAS), as well as how the liquidity crunch happened.
What is Chocolate Finance? How much assets does it manage?
Chocolate Finance is a Singapore-based financial services firm launched in July last year. It gained 60,000 customers within its first year and boasts close to S$1 billion in assets under management as at February – just seven months after its roll-out.
Founder and chief executive Walter de Oude founded insurance company Singlife, the first digital insurance company, in 2014, and obtained a licence to operate in 2017. He was there for more than seven years.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Before that, his roles included deputy chairman at insurer Aviva Singapore, and more than seven years at HSBC Insurance Singapore, where he was CEO among other roles.
He was also consulting actuary at Willis Tower Watson for two years.
Chocolate’s investors include Peak XV (previously Sequoia), one of the largest global tech investors, Prosus, as well as partners of DST Global.
Its competitors include Endowus, WeInvest, StashAway and Syfe.
What returns does Chocolate Finance offer? How does it generate these returns?
When Chocolate Finance first launched, it promoted itself as aiming for better cash returns. It offered a return of up to 4.2 per cent for the first S$20,000, just as rates on the popular Treasury bills (T-bills) were dropping. De Oude said that the platform has consistently maintained interest rates better than other alternatives.
The platform’s latest rate is now 3.3 per cent for the first S$20,000, which is still higher than the T-bills rate. It targets a return of 3 per cent per annum on any amount thereafter.
Monies deposited into a Chocolate Finance account are used to buy a portfolio of fixed-income funds. According to the firm’s website, these funds are “carefully selected to optimise risk-adjusted returns” based on factors such as duration, yield to maturity, credit quality and currency.
Examples of these funds include the UOBAM United SGD Fund, the Fullerton Short Term interest rate SGD Fund, as well as the Nikko AM Shenton Short Term Bond Fund.
How the liquidity crunch happened: its withdrawal system
To attain the returns it offers and targets for, Chocolate Finance takes customer deposits to invest in short-term funds – much like what other financial institutions do.
The difference is that it offers immediate withdrawals. Founder Walter de Oude said in a LinkedIn post on March 10 that to do that, Chocolate has to come up with the cash from its own coffers first before the settlement from redeeming the funds comes through.
“Chocolate fronts the cash before receiving settlements (T+2 days). A withdrawal spike can deplete our liquidity buffers, requiring a temporary pause,” he said.
“If customers withdraw, we sell the equivalent investments and return the proceeds – sometimes instantly, sometimes after settlement,” he added.
Liquidity crunch part 2: customers gaming its rewards programme
That system of immediate withdrawals was tested when the bill payments that customers made surged “far beyond expectations” in a bid to tap a rewards programme.
On February 11, Chocolate Finance started a program with rewards platform HeyMax called the HeyMax Miles partnership, which offers two miles per dollar on all spending made through the Chocolate card, even typically excluded categories. That included bill payments. That applies to payments up to S$1,000 of spending each month.
Miles earned can be transferred to 27 airlines and hotel partners, according to Chocolate’s website. That includes British Airways, Qatar Airways and the IHG group.
“It worked brilliantly for customer acquisition. However, bill payments, especially through AXS, surged far beyond expectations, making the programme unsustainable,” said de Oude.
Customers were frustrated by this “sudden removal,” leading to increased withdrawals.
Are firms like Chocolate Finance licensed by MAS?
Chocolate Finance has made clear that the amounts deposited are not guaranteed by the Singapore Deposit Insurance Corporation (SDIC). The SDIC protects funds in banks for up to S$100,000 per account. Funds deposited with Chocolate Finance are held separately by custodians – HSBC and State Street.
Chocolate Finance is a brand of Chocfin, which is a capital market services licence holder regulated by the MAS. This licence enables the firm to conduct regulated activities such as dealing in capital markets products and fund management.
