In early March, financial services firm Chocolate Finance announced it had suspended instant withdrawals, causing concern among customers. This raised questions about the safety of digital banks and investment platforms.

Avishek Nandy from Bain & Company gives Andrea Heng a quick lay of the land in this week’s Money Talks Explains.

Here is an excerpt from the conversation: 

Andrea Heng, host:  So in the case of Chocolate Finance, at first they paused withdrawals and then they imposed withdrawal limits because there was a surge in people withdrawing funds.

But there can be many reasons why more people want to head to the ATMs and withdraw their money, right? Sometimes it could even be a rumour. So when does it become a serious problem? Because from the consumer's perspective, I need to know what the signs are to know that this is going to be a bank run and I better get my money out.  Avishek Nandy, Bain & Company: So firstly, investment platforms, when they are making certain promises to customers around instant withdrawals (and) rewards etc, they need to have safeguards or reserves in place. So for example, if I am putting in my money in an investment platform that's investing the money in a money market fund or a fixed income fund, that liquidation of that fund does not happen immediately. 

But if (I am) promising that I am going to give (the) customer instant liquidation, I need to have enough reserves in place, because I might take two days to liquidate the fund, but I will pay you meanwhile.

And I think in this situation, that was partly the problem. Andrea: And in the case of companies like StashAway and Chocolate Finance where the money is invested, as a consumer you do have to absorb some of that risk ... But can there be guarantees on the outcomes of some of those investments?

Avishek: I'm a big believer that as an individual consumer, you have to understand the risks and take control of the decision. So before I'm investing into something, I need to understand - what is it being used for? What is the fine print? What (are the) restrictions or conditions that are in place? And I think there's no running away from that.   

And then of course, there are certain safeguards from a regulatory standpoint and all that is in place. In this situation, it was a matter of liquidation of the funds. It was not that the money was lost. It was not that (the customers) are not going to get it back. It was a matter of time ... So as a consumer, I would need to be aware and understand these different platforms and the propositions that they bring.