UPDATE 2-Brazil central bank liquidates Banco Neon in fintech setback

(Adds comment from Neon Pagamentos)

SAO PAULO, May 4 (Reuters) - Brazil’s central bank liquidated small lender Banco Neon SA on Friday due to a breach of regulations, and suspended operations of an associated tech startup that had raised $22 million in venture capital the day before.

Neon Pagamentos SA - a financial technology startup, or fintech, that used the infrastructure of Banco Neon to process checking accounts - was not liquidated, the central bank said. However, it was forbidden from opening new accounts and its current users may have their accounts blocked.

Banco Neon did not respond to requests for comment. Its website posted a copy of the central bank decree liquidating the bank due to “grave violations of legal and regulatory norms” and its “compromised financial situation.”

Neon Pagamentos said in a statement that it was working to find a new banking partner to normalize its operations. The startup added that cash in its payment accounts could be normally withdrawn, although services such as transfers, credit cards and access to certain interest-yielding deposits were temporarily interrupted.

The controlling shareholders of Banco Neon hold a stake of less than 20 percent in Neon Pagamentos, a central bank press representative said.

On Thursday, Neon Pagamentos said it had raised $22 million in Brazil’s biggest-ever series A round of venture capital funding, which included Propel Venture Partners, Monashees, Quona Capital, Omidyar Network, Tera and Yellow Ventures.

Omidyar Network, an investment firm created by eBay founder Pierre Omidyar, said in a statement it continues to “support and believe in Neon Pagamentos’ business model and team.”

The intervention underscores a delicate situation for Brazil’s nascent fintechs, which have faced minimal regulation from the central bank in recent years but often rely on the infrastructure of small banks that come under close scrutiny.

Banco Neon holds 0.0038 percent of assets in the Brazilian banking system, according to the central bank.

“It should be noted that the irregularities found at Banco Neon are not related to the opening or operation of digital accounts or issuance of pre-paid cards, which is covered under an operating agreement with Neon Pagamentos SA,” the central bank said in a statement.

The fintech, which reported 600,000 users in Brazil and 190 employees, launched a credit card last month and transferred its controlling interest to an unspecified UK holding company as part of the fundraising, Neon Pagamentos said in a statement on Thursday. (Reporting by Iuri Dantas and Carolina Mandl; additional reporting by Aluisio Alves; editing by Brad Haynes and Rosalba O’Brien)