Wirecard has gone: one of the biggest card acquirers in Europe and elsewhere too. It was a major ‘new tech’ company in Germany, and only last year planned its bid to buy the 150 year old Deutsche Bank. We now know this was part of the deliberate ruse.
In 2019, the UK Financial Times reported the Wirecard fraud and how it had taken several years for its auditors to expose what had been detailed as a ‘financial reporting’ fraud – i.e. a company that said it had €1.9 billion more in cash than the auditors could find!
But why did it fail? Why do other acquirers fail? Why did this one struggle? And what makes acquirers succeed?
But more importantly, who will be next?
Card acquirers fail each year, typically doing so quietly, and as a result of national regulator actions, card scheme sanctions or pressure. Once a regulator or the card schemes ‘get their teeth into’ these companies: it most certainly signals ‘the start of the end’.
Many acquirers struggle to make profits, because of a combination of:
- High processing costs and thereupon small margins,
- The need to employ sales agents that take large cuts from the margins,
- The need to spread fixed costs across a broad/ wide number of merchant businesses,
- A hard and very competitive market, where acquirers undercut one another and seek to acquire volumes at the expense of profits,
- Increasing card scheme fees, that cannot always be quickly passed on to merchants.
Card acquirers must then:
- a) have a ‘volume business acquisition’ strategy to distribute the ‘costs of being an acquirer’ over large numbers of customers and/or
- b) Identify and choose a higher-margin, higher-risk business that they are likely to be able to service well, manage well, and where they control and understand the risks.
This brings serious challenges. In the case of Wirecard, we know from the reporting that:
- a) Control mechanisms and governance controls were not strong. The incoming chairman in 2020 was appalled at what he found. The key executives were able to hide this: which demonstrates the significant failings of the independent board members along with second/third lines of defense in corporate governance. The fact that the CEO and COO (and others?) were able to hide a €1.9 Billion ‘hole’, to control their independent board members and to control the ‘message and direction’ should never, ever happen. Equally and potentially, Wirecard were able to ‘bully’ and/or deceive the national regulators (BaFin especially), auditors and card schemes. So even though these people did not have their ‘fingerprints on the daggers’ they were all clearly also culpable.
- b) Safeguarding: It is clear that customer funds were NOT safeguarded: up to a staggering €1.9 billion. Does the ‘buck stop’ with the CEO. Of course, but the auditors again failed to ‘get to the bottom of this’ for several years. So did the rest of the Wirecard board and certainly the independent directors. There are a lot more people that are culpable here and more than just the CEO: some of whom should also go to jail. It seems that everyone else that might also be culpable: will surely now make sure that it is the CEO that is blamed and will be the only one that will be ‘left swinging’.
- c) National Competent Authorities, i.e. the regulators, along with the card schemes should also not be too easily exonerated. It is clear that whatever they did know or should have known: the size of the Wirecard business, and the sheer gall of the executives (older and newer alike) allowed Wirecard ‘certain privileges’ that permitted it to continue trading where and when others would have failed. It seems that Wirecard was probably deemed ‘too big to fail’ for too long.
Wirecard had such a sizable portfolio, and such a significant gap in its financials: that we can only start to speculate the full extent of the dishonesty, deception and incompetence. We now know from the Wirecard auditors that the EU business was loss-making and that the Asia/Pacific business was ‘seemingly’ profitable (but also where the alleged ‘missing funds’ were supposedly located). So we must look for signs: which we need to remember were always present; even if it is to review the ‘Zatarra papers’ that are increasingly proving to have been correct in more and more places.
These documents named and detailed culprits several years ago, and were consistently attacked by Wirecard when various allegations therefrom were picked up in the media. We should hope that these are now being looked at by the ‘prosecutors’, and consider whether even those who were behind the publication of these papers were they implicated too. Maybe they were not just stock-shorters as alleged by Wirecard: but insiders that did not ‘do their duty’ to formally raise and report concerns. Or where they people who were uncomfortable put under pressure not to act, so they took an anonymous stance?
Our speculation must therefore lead us to:
- a) The board and the CEO/ COO that must have amongst them known exactly where and what the losses were; and conspired to conceal the losses. In theory, they could have been utterly stupid, which we should clearly dismiss: given their repeated investigations and dismissal of them, and ultimate findings that the money clearly did not exist.
- b) Conclude that the Wirecard business in Europe was either:
- Priced to undercut the competitors in search of volume business.
- Priced poorly, OR, much more likely and possible to evidence:
- Inaccessible to other acquirers in the market because of the dubious nature of this business – i.e. not fully scheme compliant, potentially illegal, breaching AML law through significant cross-regional transactional laundering.
And the profitability of the business is Asia? Was this business really profitable?
There are far too many unknowns and also too much that will yet be revealed (or ultimately veiled to protect the financial systems and reputation of regulators and card payment schemes) in relation to this case. But we know that there is so much and so many aspects of this case that simply ‘do not add-up’.
Industry mutterings and speculations indicate that the key people at Wirecard (again the CEO and COO but others too?):
- Allowed or conspired to aid and abet, cross-continental transaction laundering. This has been the inference in the reporting that has appeared either the official ‘reporting’ or the often under-recognised Zatarra documents: all of which has kept surfacing over the last five years.
- Somehow elicitly involved executives and/or counterparty claw-offs (knowingly or passively?) for acquiring loss-making merchants, illegal transactions and money laundering processing where others could not do so. This is a problem that will now challenge us as a heavily regulated industry and will quickly be transferred to other acquirers and continue to haunt our industry into the future. Every regulator and card scheme should now be worried about:
- Where the more questionable Wirecard customers will have moved to next. Industry insiders will have witnessed a ‘feeding frenzy’ from the Wirecard portfolio,
- Which acquirers will require additional supervision. This is very concerning.
Every acquirer across Europe should be aware, but who will have no chair ‘when the music next stops’?
The writers have a high level of confidence in the regulators – BaFin and also in the card schemes. They will now ‘follow the money’ and establish who the next acquirers are that start to process, to find and track the illegal money laundering now that Wirecard is no longer a vehicle. But will the card schemes and regulators move more assertively now, or allow ‘another Wirecard’. “Wirecard, jailed executives, fail to learn, then repeat” perhaps?
Who will take-over now that Wirecard ‘has left the party’?
We are aware that there are key individuals who know where this business is going. There are agents that are busily and knowingly ‘placing this business’ with the next, and the not so diligent acquirers around the globe. It is really a matter of how long it will take the card schemes, the regulators and then for law enforcement to act. They have the tools now and do know where and how the traffic is travelling. They just need to now act assertively and not be frightened-off by the ‘next bully’ who processes this business.
Hopefully, the Wirecard events will educate us all, deter some, frighten others and drive a few more people towards reporting these matters appropriately to the right authorities, and hopefully in a more public way than we saw in the ‘Zatarra papers’.
We will continue to monitor regulatory and payment network progress as we learn more about this case and hopefully everyone will be more observant and challenging going forward. Failure to do so will lead to serious and more fundamental questions on the effectiveness of those who should ensure that as an industry, that we have a legal, compliant, competitive and transparent payment system.
About Kevin Smith
With over 25 years in the payments business, Kevin is a trusted and experienced practitioner and thought leader in payments, technology, issuance, acceptance and acquiring.
About Bill Trueman
Bill Trueman is a professional banker and a payments and risk specialist, with over 25 years of experience. He headed-up risk functions and special investigations in Lloyds Bank issuing and acquiring; acquiring and processing at First Data, and then for insurance risks at RBS / Direct Line.
Riskskill is a leading Europe-based payments and risk management consultancy. Riskskill.com is a global GARS Reviewer for Visa. For more information visit website at www.riskskill.com
For further information, please contact: Bill Trueman or Kevin Smith at firstname.lastname@example.org