Opinion article by Peter Cox, Executive Chairman and Founder at Contis. First published in Global Banking & Finance Review.
The Wirecard crisis may be the largest scandal our industry has ever faced. New daily revelations expose what appear to be layers of fraud and deceit running to the company’s very core. With ripples affecting Wirecard’s bankers, auditors, clients, customers and regulators, few are unscathed.
When the dust settles, the whole industry will need to take stock and ensure lessons are learned. We could also do with a very frank and perhaps painful look at what led us here.
As reports emerge, it seems Wirecard developed a culture fixated on growth at all costs. From the beginning, it appears the business may have developed in the riskier areas of merchant acquiring including pornography and off-limits gambling. Areas that many financial services businesses steer clear from in today’s highly regulated world. It also appears the company might have lacked effective internal controls, oversight committees and sophisticated technology to monitor business activity and compliance. All essential in a financial institution of its size.
It’s worth noting that Wirecard did genuinely develop excellent technology for money transfer in acquiring and card issuing. They have many talented employees and a reputation as a great place to work. They’ve also been known to provide good business solutions and client care.
The problem seems to be one of culture rather than competence. Put bluntly, a cavalier approach to customer acquisition, internal accountability and a turbocharged geographical expansion may have led to a loss of control. Increasingly risky behaviour might have been allowed to take root, it seems, among senior executives with an eye on the share price and perhaps personal gain at the expense of accountability.
With most fintechs, revelations of fraud and corporate delinquency might spell trouble for a few senior leaders and become a cautionary tale for the rest of the industry. But, given Wirecard’s unique position as the poster-child for Central European fintech innovation, and its sheer size and global reach, the fallout is much greater. It once enjoyed protection from German regulators, who accused its critics of market manipulation. But now it’s casting a shadow over Germany’s regulatory capabilities. Many also question why accounting irregularities weren’t picked up by auditors, and why journalist warnings were silenced rather than believed.
Could this all be indicative of a greater malaise at the heart of European fintech? How can we be sure Wirecard is a one off?
It’s impossible to know, of course. But Wirecard may not be the only player to face problems over the coming months. Unfortunately, the fintech ecosystem is littered with payments providers that might not have survived in the more scrupulous mainstream banking space. While chasing triple digit growth, some have been less than careful in their practices and client acquisition. What looks like ‘being disruptive’ at first glance can turn out to be ‘breaking the law’ upon closer inspection. For the inexperienced or those new to payments, it can be tempting to compromise on compliance, audit and internal controls. Only time will tell whether other players are exposed in the regulatory tightening that will undoubtedly follow.
So how will this impact the industry long term?
You can be sure investors will become more cautious and put greater focus on evaluating risks, both financial and reputational. Fintechs and companies will likely be more hesitant to partner with service providers. Due diligence will surely be improved as trust becomes a scarcer and more precious commodity.
Viewing the glass as half full, this episode might hopefully be a positive shot across the bow of the industry. It might usher in a period of more appropriate regulation. Outsourced services could become more essential to the entrepreneurial process. Indeed, companies might rely on experts and professionals to ensure what they’ve built includes the right regtech and oversight systems to keep them secure.
Overall, I think the industry will be split into two groups: those that choose to mitigate risk by becoming masters of their own destiny and reducing their dependence on partners, and those that put their trust in experts.
The former will require colossal investment and significant risk as many businesses attempt to re-invent the wheel without the funding, time or expertise to match the best providers. They’ll face the additional challenge of keeping up with changing regulation in areas that aren’t core to their business.
The latter, who put their trust in experts, will join force with large existing players – who provide support services such as acquiring, issuing, processing and banking-as-a-service – and develop the agility and flexibility that delivers necessary change quickly. For those that succeed, the reward will be longevity and continued growth.
Predicting the future is of course an impossible challenge. But I think we can expect a post-Wirecard world where investment is harder to come by, regulation is tighter, trust is in short supply and appetite for risk has dwindled. Combined with the effects of Covid-19, this may spell collapse for smaller and less scrupulous players. However, for those built on accountability, rigorous processes and genuine expertise, there’ll be renewed opportunity.