Zara Yusuf analyses the key moments and implications of the Wirecard scandal.
The spectacular collapse of the German payments firm Wirecard came about in June, after it was found to have a £1.7 billion-sized hole in its accounts, leading to Germany’s biggest technology fraud scandal. Formerly the fintech darling of both Germany and investors, particularly as it was one of the few tech companies that had ascended into the prestigious DAX 30, Wirecard has revealed cracks in how fintech companies are regulated. Here the impact of the Wirecard scandal on the fintech sector will be explored, along with other resulting consequences.
Starting out in 1999, Wirecard AG processed payments for gambling and adult websites. Now the company claims over 300,000 firms globally as its customers, including China’s WeChat, FedEx, Apple and Google. Wirecard allows these businesses to accept credit card and digital payments, online or on mobile, while also ensuring that merchants will receive the owed money, in return for a commission. Its extra services include analytics based on the data generated from the customer transactions, so that businesses can gain a unique insight into their consumers and their purchasing behaviours.
Stemming from investigative research undertaken by the Financial Times in January 2019, accounting irregularities were brought to light, particularly in Wirecard’s Asian division. These multiple warning signals were mostly ignored, until Wirecard’s auditors EY reported that they could not locate £1.7 billion worth of cash in the company’s balance sheet. Seemingly, Wirecard’s Asia-Pacific team inflated their sales through a ‘round-tripping’ strategy, in order to show significant business revenue to investors and customers. Then the firm denied any wrongdoings and delayed the audit report from EY, before hiring KPMG to run its own report, which resulting in an inconclusive outcome. Only then did Wirecard admit that the money likely never existed. The cat was out of the bag.
Since then, the former CEO Markus Braun has been arrested (then released on bail), the Wirecard stocks have completely plummeted and the company has filed for insolvency. The digital payments company once had a valuation of $25 billion, but now it has sunk to approximately $2 billion, owing its creditors debts that total around $5.7 billion. As of the 25th August, the district court of Munich has opened the insolvency proceedings with regards to the assets of Wirecard AG.
The ripples of the Wirecard scandal can be felt in multiple fields. It follows in a long line of other international accounting scandals that have materialised, adding to the pressure placed on accounting firms by UK regulators and politicians to separate the audit section from the non-audit teams. This would help to maintain the brand, reputation and client relationships of these businesses. As an EY partner has said, Wirecard could ‘accelerate calls for separation from within, not just from the outside.’
Despite multiple warnings of Wirecard’s malpractice from The Financial Times, analysts, investors and regulators (including Germany’s financial supervisor BaFin and the Financial Reporting Enforcement Panel (FREP)) ignored the media and trusted Wirecard’s management. So, why was this? Perhaps, as Forbes noted, it is due to the behavioural biases that permeate these institutions. In a bid to compete with top tech corporations and as fintech companies are synonymous with words like ‘innovation’ and ‘disruption’, Wirecard has been shielded from the scrutiny that is paired with standard businesses. This could be why BaFin rallied around Wirecard and sued individuals targeting the firm, including McCrum, the lead investigative journalist from the Financial Times, for suspected market manipulation. Similarly, the reaction of investors indicates a lack of independence and a collective overwhelming belief in the fintech sector, with Wirecard as the shining star.
After orders from the Financial Conduct Authority, Wirecard’s UK division were forced to stop carrying out their planned activities. This led to thousands of customers being unable to access their money, owing to several online banking apps being reliant on Wirecard such as Curve, Pockit and Anna. It is likely that the public’s trust in the fintech sector will decline as a result of this scandal and the freezing of the accounts, especially as it affected a wide audience: from individual users to all sizes of businesses. Consumers may turn to more traditional and established banks, so as to avoid such disruptions, thus impacting the wider fintech sector too. Conversely, former customers of Wirecard may look for a viable alternative, when considering the analytics and marketing features of the company. Clients may therefore search for dependable fintech companies that can offer similar features, therefore leading to a more even playing field between the competing corporations. It is interesting to note that despite the media highlighting the discrepancies in Wirecard’s accounts, these businesses continued to use Wirecard, without a backup plan.
The Wirecard scandal has also exposed flaws in how fintech corporations are regulated. According to the European Banking Authority, around 31% of European Fintech firms are not subject to any regulation. This shows how fintech firms fall into a grey area of regulation, owing to its hybrid nature and rapid evolution. It is therefore important that the regulation, risk management and compliance in these corporations advance at the same speed as FinTech, in order to avoid similar incidents. Firms comparable to Wirecard may recognise that they are in the business of trust and that they will be unable to recover from such a scandal, so they will be actively seeking to improve the management and credibility of their business.
To conclude, the Wirecard scandal serves as an example to the wider fintech industry of the dangers that a lack of compliance, regulation and risk management can cause. The ramifications of this scandal may now shape the development of fintech companies in a rapidly growing sector.
By Zara Yusuf .