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Wirecard: the rise and fall of a fintech giant in Asia

Wirecard: the rise and fall of a fintech giant in Asia

Source: Business Times
Article Date: 24 Sep 2020
Author: Paul Condylis & Emir Hrnjic

Notwithstanding the fact that its subsidiaries did not file for bankruptcy and may not have been involved in the misdeeds, Wirecard's remaining business is in serious trouble.

News broke recently that fintech company Railsbank has agreed to acquire its competitor Wirecard UK's remaining assets, clients, and a number of employees. Moreover, Wirecard sold its operations in Brazil and advanced the process of selling its North American operations.

Once the darling of the fintech industry, Wirecard is now in a predicament.

In a dramatic turn of events, on June 18, 2020, auditing firm EY refused to sign off on its financial statements and Wirecard admitted that roughly 1.9 billion euros (S$3 billion) in two Philippine banks did not exist. Within several days, the CEO was arrested for alleged fraud, the company filed for bankruptcy protection, and Wirecard's share price collapsed from more than 100 euros to less than 2.50 euros.

In the largest auditing scandal since Enron, the Financial Times reported that EY did not do even basic auditing procedures such as confirming with the banks that they held large amounts of cash in Wirecard's trustee accounts. Even the German finance minister was aware of potential market manipulation at Wirecard a year and a half ago, but he, too, failed to act.

But how did a tiny German payment processing company manage to enter such a competitive business and develop at such a spectacular rate?


After starting a subsidiary in Singapore in 2007, the company grew rapidly in the Asian market due to acquisitions of small Asian mobile payment companies.

Wirecard entered the fringes of the market serving merchants with less-than-stellar reputation such as pornographic websites and online gambling that conventional banks avoided due to high risks and small margins. Wirecard managed to disrupt the payment processing market due to its ability to charge less than its main competitors and willingness to onboard riskier customers.

Moreover, as conventional banks licked their wounds after the global financial crisis in 2008-2009, Wirecard and other fintech companies started processing electronic payments faster than banks and chipping away their market share.

Finally, the fintech companies started investing heavily in powerful machine learning models capable of offering better risk management and fraud detection as well as creating powerful databases of their customers.

After rapid expansion in the mobile payment business in Asia, the Asian business started earning almost half of the group's revenues.


Even after the parent company filed for bankruptcy protection in Germany on June 23, the subsidiaries proceeded with their business activities.

Germany's financial regulator BaFin stated that they would "continuously review whether insolvency applications also have to be filed for subsidiaries of the Wirecard Group". On June 26, the British financial regulator FCA (the Financial Conduct Authority) suspended the activities of Wirecard's UK-based subsidiary but lifted the restrictions three days later.

Closer to home, the key concern is how the German parent's bankruptcy affects the Singapore subsidiary. While the trustee did not rule out that Wirecard subsidiaries may have to file for insolvency, theoretically, businesses of Wirecard's subsidiaries should be judged on their own merits.

In fact, the Monetary Authority of Singapore (MAS) said on June 30 that it was closely monitoring the operations of Wirecard's entities in Singapore. They "have complied with MAS' directions to hold customers' funds in segregated accounts with banks in Singapore", thus ensuring that the funds are safe from the German parent's bankruptcy.

Since Wirecard has very few tangible assets, the risk is that its business will lose substantial value if clients start switching to competitors.

Moreover, FT reported that Wirecard's main 100 customers accounted for more than half of its genuine sales.

Notwithstanding the fact that some Wirecard transactions were fictitious and the company may not have as many customers as claimed, Wirecard's market share in Singapore is likely sizable.


Unfortunately, the German parent's bankruptcy likely spooked the customers of Wirecard's subsidiaries in Singapore.

Wirecard entered a payments agreement in March to process transactions made via the GrabPay e-wallet used by more than 600,000 merchants in the region. That partnership was put on hold immediately after the news of the German parent's bankruptcy.

Just a few days later, Visa and Mastercard announced that they are considering revoking Wirecard's ability to process payments on their networks.

Bloomberg and The Business Times reported that many other Wirecard clients started leaving the company immediately after the scandal broke.

Moreover, Wirecard's competitors started aggressively poaching its customers by offering them attractive custom-tailored packages and expedited migration.

The first customers to jump ship are likely the safest businesses that should be easily onboarded by competitors. As Wirecard's safest customers keep switching, the remaining portfolio will become riskier. As the remaining portfolio becomes riskier, Wirecard will have a harder time to retain competitive pricing and the downward spiral is inevitable.

Notwithstanding the fact that its subsidiaries did not file for bankruptcy and may not have been involved in the accounting and auditing misdeeds, Wirecard's remaining business is in serious trouble.

The payment processing business is mostly a business of trust and if the trust is lost - business is gone. If Wirecard customers believe that the company will go bankrupt, it will likely go bust as a self-fulfilling prophecy. In the best-case scenario, the Singapore subsidiary will be acquired just like its counterparts.

Paul Condylis is a head of data science at Tokopedia Singapore. Emir Hrnjic is head of fintech training and senior research fellow of Asian Institute of Digital Finance (AIDF) at National University of Singapore (NUS). The opinions expressed are the writers' and do not represent the views and opinions of Tokopedia or NUS.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.


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