If you’ve been following fintech news over the past couple of months, you’ve surely heard about the collapse of Wirecard. The German fintech giant, which was once hailed as one of the country’s biggest companies, has officially collapsed on June 25.
Wirecard, which offered e-payment services, risk management, as well as payment cards ended up owning their clients almost 3.5 billion pounds, due to a gaping hole in their books. The authorities suspect that the hole was a result of a sophisticated global fraud.
Much has been said about the entire situation. However, it feels like not enough has been said what the situation means for other European fintech industry as a whole. Running a fintech company is extremely complex and requires understanding the business model completely.
But let’s start from the beginning and talk about…
What Wirecard Claimed to Do
Founded more than three decades ago, Wirecard was one of the first companies in Germany – and Europe, as a matter of fact – to offer modern transaction services on all continents. At its peak, Wirecard was valued at 25 million pounds.
For many years, it was listed as one of the 30 biggest companies in Germany on the prestigious DAX stock index. However, in the past couple of years, the company has come under a lot of scrutiny. It was investigated several times over the course of the last five years.
In their 2018 yearly report, Wirecard claimed to be a global tech group that supports its customers in “accepting electronic payments from all sales channels.” They also said that their uniform approach to transactions seamlessly integrates analytics, banking, and other services.
Furthermore, according to last year’s ESMA report, Wirecard allowed users to connect to more than 200 international payment services, including banks, digital solutions, and card networks. This resulted in over 34,000 clients from a wide variety of industries.
What Wirecard Actually Did
Wirecard was an acquirer of payment transactions. It operated as a middleman between online merchants and their banks on one hand and consumers, card issuers, and their banking services on the other hand. It also provided a number of related tech services.
Acquiring different activities, in some cases, was done directly though Wirecard Bank AG and Wirecard Card UK. In other cases, it was done through licensed 3rd-party acquirers. Tech services were offered by online platforms, which were instrumental in implementing an effective risk management strategy. Or so Wirecard representatives claimed.
A large share of Wirecard revenue came from unregulated payment and risk management activities. Some reports say that as much as 75% of Wirecard’s revenue came from activities such as these. Only a small fraction of the company’s revenue was coming from acquiring and issuing businesses.
According to a KPMG audit a big chunk of Wirecard profits – especially in Asia – was seaming forged through a network of organizations, indirectly controlled by the owners of Wirecard. The report also revealed that almost 2 billion euros of alleged reserves Wirecard had were fake.
Four Things the Fintech Industry Can Learn From This
The entire situation caused an uproar across Europe. Many people were calling for a new government body to form in order to oversee fintechs and prevent situations similar to this from happening ever again. However, this wouldn’t be the right move.
In Europe, fintechs play a huge part in the financial world. It’s estimated that fintechs control 50% of the overall consumer financial market. They need to be regulated carefully and fairly.
When regulating the fintech industry, balancing the gains for tech innovations in the financial industry with the possible stakeholder risks is out of utter importance. To avoid situations like these from happening, here’s what officials need to do:
1. Avoid Unnecessary Regulatory Arbitrage
People that want to regulate the fintech industry can’t be lagging behind the industry developments. Finding up-to-date regulators will level the playing field among fintech and traditional companies and give everyone a fair chance. Regulators also need to ensure that traditional entities abide by the same rules and regulations as fintechs. There can’t be any bias.
2. Understand What Fintechs Are and How They Work
Again, regulators need to know how everything works, in order to come up with proper laws. They need to understand what makes fintechs profitable businesses and what can potential y enhance or disrupt their activities. Lastly, regulators need to know how fintechs interact with other financial – as well as non -financial – markets. Here, sandboxes can be useful, as long as they don’t create unhealthy links between the regulators and the regulated body.
3. Oversee the Entities and Activities Together
Unbounded activities in the financial sector should be overseen independently of the form of incorporation adopted by the fintech and independently of other activities performed parallelly. The overseeing of the financial markets can’t be compartmentalized. It has to be overseen as a whole. If not, many loopholes may emerge for companies with an intricate web of activities. Luckily, the European Commission has proposed a move in this direction.
4. Be Familiar With Technology Used by Fintechs
Last but not least, the regulators need to be familiar with all of the technologies that allow fintechs to extract, refine, and use customer data to improve their services. These technologies are tools that allow fintech clients to perform standard financial activities. The regulators need to understand this. It will enable them to monitor and access fintech algorithms much more easily. After all, modern, AI-based companies require complex oversight approaches.
When new types of problems arise, often new authorities are proposed to address them. Historically, the European Union has had a tendency of doing this. However, there’s no actual need for a new regulatory body to oversee fintechs, which operate mainly in Europe.
Investor protection is important to the fintech industry, no doubt about that. But Wirecard’s case shouldn’t be considered a call for new authorities. Instead, it calls for more international coordination, harmonization, and cooperation of auditing firms.
In order to protect the end-user, regulators from all over the continent need to work together and monitor fintechs closely without hindering their operations in the process.