“There will be more of a distinction made between banks and non-banks”
By Richard Young
July 14, 2020 | bobsguide
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By Richard Young
July 14, 2020 | bobsguide
When auditors KPMG discovered a €1.9bn black hole in the accounts of German payments giant Wirecard last month, shockwaves were sent across the financial world. The ongoing scandal has raised questions for many, not least accounting firm Ernst & Young, whose previous audit had failed to uncover the anomaly, and former Wirecard CEO Markus Braun, who was arrested on suspicion of falsifying accounts.
Kate Hampton, VP of corporate development at payments technology company NMI, believes it will have a knock-on regulatory effect. “In the long term, there will be more of a distinction made between banks and non-banks and the associated regulations that go along with each as the Wirecard scandal plays out,” she says.
“We’ll continue to see the tightening of regulations on ‘gray areas’ in the payments space to avoid repeating scandals of this nature in the future. The payments space has been on the consolidation streak for quite some time now, meaning that the big players continue to buy up the smaller ones, including start-ups. It will be interesting to watch if regulatory scrutiny will increase and to what degree with these future consolidations.”
According to Darren Upson, VP for small business at financial software company Soldo, the affair will lead companies to examine their risk exposure when it comes to their internal processes. “I think businesses involved in payments will start reassessing their supply chain to identify potential weak links, he says. “But we have to acknowledge that most fintech businesses wouldn’t exist without building atop third-party solutions like Wirecard. This particular issue with Wirecard was not a payments industry issue – it was fraud at a grand scale, and the result of very questionable auditing from prior years. The actual technology behind the offering was rock solid – the only reason for the outage was the temporary suspension by The FCA of WDCS, the UK entity of Wirecard. The truth is payments should be boringly reliable and this should never happen again.”
Hampton believes the market can expect a change in the behaviour of fintech investors in the future. “The scandal exposes the value payments companies should place on a culture of transparency, stewardship and responsibility,” she says. “Investors will certainly pay more attention to any start-up’s ethos and core beliefs moving forward, as well as scrutinise companies that seem to be growing too quickly and claiming to be doing too many things at once.”
Upson thinks the scandal will bring about a tightening of auditing procedures. “It may result in investors doing more due diligence on the stack that underpins the offering before investing, but I don’t see a huge change in approach,” he says. “I do think the actual suppliers of tech and infrastructure to the industry will be more closely monitored, with greater focus on the financials but this is reliant on better, more stringent auditing processes.”
As to the future of the company itself, Hampton says, “The hope is that Wirecard minimises any damage to customers and partners as they emerge from this scandal. There are two types of impacts that will decide the company’s future – market and regulatory. While markets can react immediately, regulators and authorities cannot. What the market thinks about Wirecard at any given time is indisputably reflected in the company’s stock price. Right now, the picture is unflattering to put it mildly, and markets are communicating that the company has no value. Regulators and authorities will have several tools at their disposal, and it will take them considerably longer to chart an appropriate response to the events compared to the market’s response. Whatever they decide will seal the deal one way or another.”
Upson, however, is more optimistic: “Wirecard will survive this,” he believes. “Their CEO and senior management might go to jail, but the team in the UK are great and have been a huge support to us from day one through to the migration to Mastercard as principal members. Will the business change shape? Yes. But they will recover from this and continue to provide the base service for future fintech offerings. Of that I have no doubt.”
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