Your startup triggers fraud alerts: Why the banking system fails founders

Here's what raises red flags for a bank:

• A newly incorporated company
• One or two individuals who own the entire thing
• No trading history
• No revenue
• No customers
• A sudden large capital injection from an offshore jurisdiction
• Directors in multiple countries

Now here's what a seed-stage startup looks like:

• A newly incorporated company
• One or two founders who own the entire thing
• No trading history
• No revenue
• No customers
• A funding round from a VC fund (domiciled in the Caymans, Luxembourg, or Delaware)
• A distributed team

The compliance system can't tell the difference. And honestly? It's not trying to.

The Opt-out

When Starling Bank faced regulatory penalties for inadequate anti-money-laundering safeguards, management selected cost reduction over process improvement. Rather than developing robust assessment frameworks, they terminated onboarding of flagged accounts and removed existing ones.

This approach reflects institutional logic. Legacy banking institutions bear compliance expenses exceeding hundreds per account. Competing fintech firms automated extensively, maintaining minimal KYB expenditures for economic viability—high volumes processed rapidly with minimal discretionary judgment. Venture-backed startups occupy an uncomfortable middle ground: too expensive for traditional banks, insufficiently standardized for automated neobank systems.

The financial sector can readily distinguish startups from fraudulent operations. The genuine constraint is economic: serving this segment unprofitably at their operational scale. Institutional preference would favor non-service, though regulatory constraints prevent explicit refusal.

One due diligence after another

Venture capital investors conduct exhaustive examinations. Lead investors investigate historical employment, reference prior colleagues, retain legal counsel for cap table analysis, and employ accountants for financial projections. These efforts protect reputational capital and institutional funds.

Subsequently, banking institutions request elementary documentation—basic website confirmation, for instance.

VC funding represents intensive credibility verification. Yet banking compliance teams operate independently, utilizing questionnaires designed for small commercial enterprises. Startups duplicate rigorous investigative processes: first satisfying sophisticated investors, subsequently navigating unsuitable institutional forms. Most founders maintain multiple accounts, repeating documentation requirements repeatedly.

The safety theatre

Founders frequently presume established banks offer superior security. Deposit insurance. Regulatory frameworks. Implicit "too-big-to-fail" assurances.

This assumption lacks precision. European deposit insurance typically covers €100,000—insufficient for seed-round capital reserves. Remaining funds depend entirely on institutional balance sheets, which (as Silicon Valley Bank demonstrated) evaporate rapidly.

Even insured deposits require extended processing during institutional failure. Regulatory authorities freeze accounts while determining creditor priority and distribution timelines—potentially months. Startups needing weekly payroll find extended fund unavailability impractical. "Your €100k eventually returns" provides minimal operational comfort.

Banks do not inherently provide the security founders imagine. Critical questions concern fund custody location and immediate accessibility, not institutional licensing.

What banks could see (if they understood)

Enhanced standards remain unnecessary—alternative approaches suffice.

VC backing signals legitimacy. Existing KYB completion through established institutions (verifiable via open banking) eliminates duplication. Direct founder engagement reveals pertinent details superior to standardized questionnaire processing.

Institutions rejecting startups haven't identified excessive risk; they lack assessment capability. Their operational expense structure prevents developing this competency.

Emerging enterprises with minimal revenue and international investors persist regardless. Appropriate infrastructure remains overdue.

Why Seapoint

Seapoint develops financial systems European startups should already possess. The platform treats VC backing as legitimacy confirmation rather than red flag. It leverages open banking for prior KYB verification, eliminating redundant processes. Rather than standardized forms, it features genuine founder dialogue.