Bitterness from Chocolate Finance fallout could cloud its future if trust melts away

[SINGAPORE] As the dust settles after Chocolate Finance suspended instant withdrawals and debit card transactions earlier this week, the fintech platform will have to count the cost.

What is immediately apparent is the loss of trust that customers and consumers may have in Chocolate Finance, judging by the criticism in some online posts. 

The company’s founder and chief executive, Walter de Oude, has come out to assure investors that their funds are secure and denies any “liquidity issues”.

Chocolate Finance has since said the waiting time frame for customers who are looking to withdraw their funds will be three to six business days. It has also temporarily implemented a S$250 per transaction spending limit on its debit card.

But the negative responses on social media indicate that more than a few investors will be eager to take their money out from the platform after this.

Having faith in the institution

Companies in the financial services sector rely heavily on trust; it is nearly impossible to operate otherwise.

For example, a bank needs its customers to trust that their money is safe and available when they require it. When that trust is lost, customers may rush to withdraw all their money – resulting in a bank run.

To be clear, Chocolate Finance is not a bank; it has a fund manager licence from the Monetary Authority of Singapore (MAS), and has complied with regulations around segregating customer funds.

But investors would still need to be assured that their money on the platform remains safe; otherwise, they would be wary of putting their money there.

When people smell smoke, they assume there’s a fire, one market observer told The Business Times. And whether the fears are justified or not, the easier thing for investors to do would be to withdraw all their money.

What probably made it worse for Chocolate Finance was that some online posts wrongly claimed that customers would lose all their money if they didn’t cash out their accounts.

The platform has said in its promotional material about its programme that customers will still get their money when they cash out. It will also make up for any shortfall if the performance of the funds it has invested in is subpar compared with the 3.3 per cent rate it offers for up to S$20,000 in deposits.

Adding to the panic was the fact that instant withdrawals were suspended soon after a poorly communicated move to cut its tie-up with AXS.

While erosion of trust is intangible, what will be tangibly felt by Chocolate Finance is the erosion of its assets under management (AUM).

In an interview in February, de Oude said that Chocolate Finance’s cash assets were approaching S$1 billion – which would be seen as hitting a major milestone.

If users withdraw their funds following this meltdown, how much of this AUM will remain?

Assuming a drop of 20 per cent in AUM, that would be painful but might not be too deep a fall to recover from. Chocolate Finance’s growth, however, would likely be slower than before as consumers remain wary.

A fall of 50 per cent, however, could change its entire value proposition. The platform would lose the scale it needs to negotiate preferential rates, and could also struggle to find partnerships with a lower customer base.

This would arguably be more painful and harder for Chocolate Finance to recover from.

Customers’ decision

But there is one additional factor that could make or break the platform – the psyche of Singaporeans.

Consumers in Singapore are not known to be loyal – we tend to jump between providers as we seek out the best deals – which is something financial services players here grapple with constantly.

While the outrage might ring loud for now, it could all be forgotten in a few months’ time.

Chocolate Finance still offers one of the highest interest rates for a cash account. Assuming that instant withdrawals resume, this could prove irresistible to the average Singapore consumer.

At the heart of it, the platform is still licensed and regulated by MAS, and consumers might consider this incident as just a blip and look past it.

But, for now, Chocolate Finance may have its work cut out in trying to regain trust even as it deals with a possible deluge of customer withdrawals.