Chocolate Finance CEO says withdrawal issues can be traced back to 'gaming' of miles reward system

SINGAPORE: When Chocolate Finance discovered that some customers were "gaming" its miles reward system by making big payments on AXS machines, the financial services platform decided to "nip it in the bud".

This led to "a lot of unhappiness that such a lucrative benefit was suddenly cut short", founder and CEO Walter de Oude said on Monday (Mar 10).

The change wasn't properly communicated to customers, who grew uneasy and started withdrawing their funds – hence depleting the pool of liquidity that Chocolate Finance maintains for instant withdrawals.

It ultimately meant the instant withdrawal service had to be temporarily suspended.

Mr de Oude was speaking to CNA in an exclusive interview hours after Chocolate Finance issued a statement attributing the suspension to an "unusually high" number of requests.

Chocolate Finance is operated by Chocfin, which is licensed and regulated by the Monetary Authority of Singapore (MAS) to perform fund management activities.

In response to CNA's queries, MAS said it has instructed Chocfin to ensure it returns funds to customers in an orderly manner and to keep customers informed of developments.

"MAS is separately querying Chofin about its representations of its instant withdrawals (programme)," a spokesperson said.

"ABSOLUTELY HUGE PAYMENTS" ON AXS

When Chocolate Finance designed its miles reward programme, the firm wanted its debit card to be "all inclusive" so that customers could earn on nearly anything they spent on.

This included education fees and AXS, a bill payment platform.

Mr de Oude pointed out that shops usually pay a fee to services firms like Visa or Mastercard each time a card is used, and that the fee is shared with the company issuing the card – Chocolate Finance, in this case.

When a card is used at an AXS machine, however, Chocolate Finance doesn't get any benefit.

"Yet, we were sponsoring the miles," said Mr de Oude, who previously founded insurance firm Singlife.

Chocolate Finance knew its miles programme would not be sustainable based on AXS transactions alone, but had hoped that the gains from other transactions would "subsidise" the miles it was sponsoring.

The company thought there would be a balance that way, but it didn't play out in reality.

"There was a little bit of gaming going on by customers," said Mr de Oude, adding that it gradually became "quite evident" that the company could not keep giving miles on AXS transactions.

"We had a couple of customers making absolutely huge payments on the cards ... specifically on the AXS to really maximise miles."

In response, Chocolate Finance decided to pull the plug on AXS' involvement at the start of March - less than a month after its debit card was launched.

But it did so without first informing customers.

"Giving notice would have just exacerbated the utilisation so much more," said Mr de Oude.

"In hindsight, we probably should have given a bit more time and advice and spoken it through with our customers more."

Instead, the company updated its Frequently Asked Questions page online, but the initial phrasing implied it was AXS which initiated removal of the card.

"Within hours", this was edited to reflect that Chocolate Finance had requested it, but the damage was done, said Mr de Oude.

Some customers - among hundreds angrily commenting online - felt the company was not upfront about its actions.

"We weren't as clear as we should have been. That's on us, as an organisation, (and) for us to deal with as we move forward to the next chapter of our business," Mr de Oude told CNA.

He did not directly answer CNA's questions on whether the company has looked into what caused the communication error, and whether those responsible would be penalised.

In an earlier LinkedIn post, Mr de Oude acknowledged that customers were frustrated by the sudden move, and that it led to negative reviews, increased withdrawals and overall negative sentiment toward the company.

BUSINESS AS USUAL TO RESUME: CEO

Mr de Oude reiterated in the interview that it was normal and aligned with industry standards for withdrawals to take a few days, when it comes to fund management models such as Chocolate Finance's.

"What's absolutely clear here is that all of our customers' monies is safe, it's all invested in the way it's supposed to be, and it will all be withdrawn or redeemed in the ordinary course of business," he said.

Mr Toh Zhi Han, a client adviser at wealth advisory Providend, also told CNA the "industry standard" was a few working days before an investor can receive funds. 

He said Chocolate Finance probably uses a separate fund to support its "unique" instant withdrawal feature.

But in the event of a mass withdrawal, the fund cannot support the volume and investors cannot get their money back instantly. They will instead have to wait for holdings to be sold before they receive their cash.

Mr de Oude said that once ordinary business resumes, Chocolate Finance intends to reinstate instant withdrawals. 

"We believe it is an absolutely cool thing to be able to do in our fund management universe, this has never been done before, and we think that it's a market-leading thing to do and is a game changer for people," he said.

He declined to share the specifics of how large a pool of liquidity Chocolate Finance maintains for instant withdrawals, but said the company was building it up using a combination of debt and equity.

"Ninety-nine days in 100, there will be instant liquidity. But every now and then, like we've seen today, there might need to be a pause."

He also declined to share how many withdrawal requests the company has received in total. 

"What I can say is that everybody who has put in a withdrawal request will have their money land in their bank account as planned," he said, adding that "the vast majority" of money has remained in the business.

The number of withdrawal requests has also slowed.

When customers start to see their money back in their bank accounts, faith will be restored, said Mr de Oude.

"When that happens, we'll be in a good position to put the liquidity programme (of instant withdrawals) back in."