Home Crypto News What Does Wirecard’s Shutdown Say About Fintech’s Systemic Weaknesses?

What Does Wirecard’s Shutdown Say About Fintech’s Systemic Weaknesses?

20 min read

The occasions which have taken place at Wirecard over the previous month have been a little bit of a shock to the monetary and fintech industries.

Not solely did the corporate’s inventory worth fall from roughly $100 to as little as $1.50 over the course of a number of days in mid-June (~$5.00 at press time), however a lot of fintech companies and different firms that relied on Wirecard’s companies have realized how fragile their infrastructure–in addition to the regulatory and auditing infrastructure within the fintech world–could also be.

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What occurred, precisely?

Wirecard has been the topic of a lot of investigations and authorized troubles for years, however issues lastly got here to a head final month, when the corporate was presupposed to publish auditing outcomes from 2019: as a substitute of offering these paperwork, the corporate merely introduced that roughly $2 billion was “missing.”

Shortly after this announcement was made, the corporate’s former chief government, Markus Braun, resigned; a number of days after that, Wirecard publicly acknowledged a multi-year accounting fraud scheme, and informed the general public that the lacking $2 billion most likely did “not exist” within the first place. Several of the corporate’s highest officers have been terminated.

Then, on June 25th, Wirecard’s Germany-based guardian firm introduced that it will be submitting for insolvency; the identical day, the UK’s Financial Conduct Authority (FCA) ordered Wirecard to halt its operations, efficient on June 26th.

As a end result, most of the firms who relied on Wirecard’s companies to course of funds or energy fee playing cards have been immediately left excessive and dry: the shoppers of quite a few fintech companies that trusted Wirecard for debit card issuing and e-money licensing have been immediately left with playing cards and different companies that merely didn’t work.

Companies who depend on Wirecard skilled service outages with various levels of severity

On June 30th–4 days after the FCA ordered a shutdown–Wirecard was allowed to proceed its operations. However, the incident revealed simply how rapidly international fintech infrastructure could be compromised.

For instance, Crypto.com, an organization that’s recognized for issuing debit playing cards linked to crypto-based interest-bearing financial savings accounts, was affected by the service outage.

Luckily, the corporate was capable of act quick: Kris Marszalek, the chief government of Crypto.com, informed Finance Magnates that “Within 4 hours upon the FCA’s announcement, we [had] resumed operations of MCO cards across all 31 markets in Europe, including shipping new cards,” including that “there were no disruptions to MCO Visa card programs in other regions, such as the US and Singapore.” All person funds have been protected all through the shutdown.

Kris Marszalek, CEO of Crypto.com.

However, not each one of many firms that was affected was so well-prepared, a truth that will have had dire penalties for customers of those platforms.

Indeed, Diane Brocklebank, industrial director at fintech business physique Prepaid International Forum, identified to S&P Global that members of weak teams, corresponding to migrant employees, folks counting on charities for help throughout the pandemic, and other people unable to get a checking account–might have been badly affected by the shutdown.

”Marquee establishments apparently did not detect systemic fraud.”

Jeff Truitt, Chief Legal Officer at Securrency, informed Finance Magnates that the Wirecard scandal is especially stunning “because marquee institutions apparently failed to detect systemic fraud.”

Indeed, “Ernst & Young, the Dax index, and the German regulator BaFin”–every of which have been ostensibly chargeable for regulating and auditing Wirecard in several levels–”are every recognized for his or her high quality and reliability, but unscrupulous actors at Wirecard appear to have engaged in wrongful exercise for a lot longer than they need to have,” Truitt mentioned.

“Despite the best requirements, the system failed. The solely hero within the saga appears to be the Financial Times, which began reporting on accounting irregularities at Wirecard as early as 2015 in its ‘House of Wirecard’ collection.”

Jeff Truitt, Chief Legal Officer at Securrency.

Collateral reputational injury: Wirecard’s shutdown might have harm fintech firms’ relationships with their clients

However, although Wirecard’s shutdown is the accountability of the corporate itself, in addition to the regulators and auditors that have been tasked with making certain that the corporate’s operations have been “above board”, it’s possible that among the fintech companies who have been counting on Wirecard’s companies might have suffered some collateral reputational injury attributable to wirecard’s momentary shutdown–regardless that Wirecard’s shutdown was no fault of their very own.

Indeed, “in the longer term, this may result in a significant reputational hit for Wirecard’s partners,” mentioned Seamus Donoghue, VP Sales and Business Development at METACO, to Finance Magnates.

“Given Wirecard’s origins working in sectors that other mainstream payment processors avoid,” together with on-line pornography and playing websites, the agency had developed into an organization that serviced the “alternative” aspect of the monetary world: particularly, “[Wirecard is] one of the chief issuers of prepaid credit cards for fintech and crypto startups,” Donoghue defined.

Therefore, it’s these firms that might be affected in the long run: “the reputational blow to the fintech companies using Wirecard’s technology may be considerably more enduring” than the impact on fairness and debt holders, Donoghue mentioned.

Seamus Donoghue, VP Sales and Business Development at METACO.

Indeed, in keeping with Donoghue, it is because “the argument that such companies could offer new services and products” associated to cryptocurrencies and different “alternative” monetary merchandise, whereas concurrently arguing that “their processes and funds were as safe as with traditional mainstream financial service providers” might have been weakened.

”Customers might lose religion in these firms.”

An analogous spherical of collateral injury was felt by cryptocurrency firms in 2018, when digital funds big Visa abruptly ended its relationship with WaveCrest, a card supplier that particularly serviced cryptocurrency companies, together with Bitwala, Cryptopay, Wirex and TenX.

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Andrew Howell, lead blockchain engineer at BlockDaemon, informed Finance Magnates that the incident between Wavecrest and TenX brought on TenX to lose enterprise–particularly, his personal: “on a personal note, I paid for a TenX card back in 2018 and received it only a week before it was shut down,” he mentioned.

Andrew Howell, lead blockchain engineer at BlockDaemon.

“TenX lost my business since I didn’t bother waiting around for two years until they secured a new card issuer. I’m sure this was the case with many other users, and this will likely have a reputational effect on the company that is irreversible.”

Indeed, “customers may lose faith in these companies if they do not have their funds reimbursed in a timely manner and if the companies cannot get their cards reactivated or alternatively find a replacement card issuer in the near term,” Howell mentioned.

However, “in my opinion, this likely won’t affect new entrants to the crypto space as crypto debits cards have predominantly been acquired by enthusiasts who have been around the industry for a while.”

“Wirecard does not appear to have branched out to service crypto firms in any meaningful way.”

Securrency’s Jeff Truitt additionally identified that whereas Wirecard’s shutdown might have nominally affected the cryptocurrency business, “Wirecard does not appear to have branched out to service crypto firms in any meaningful way.”

“As reported yesterday, Wirecard’s UK subsidiary issued two crypto payment cards which have now resumed operation,” he mentioned, including that “few of the press articles relating to Wirecard mention virtual currency at all.”

Rather, the shutdown appears to have had a bigger impact on different pockets of the fintech sphere: “payment card issuers like Curve and Pockit have experienced disruptions as a consequence of the Wirecard collapse that are likely to persist for a while,” Truitt informed Finance Magnates.

Recognizing potential issues with Wirecard even earlier than the scandal happened in June, a few of these firms have been reoprtedly already looking for options to the agency earlier than the incident got here to a head. For instance, S&P Global reported that Curve “had already been in the process of cutting out the middleman before the Wirecard scandal.”

“Wirecard’s collapse will catalyze the innovations of new accounting methods and RegTech.”

Regardless of the specifics of the Wirecard scandal might have affected its consumer firms, one factor has been made clear: there must be some sort of an infrastructural change.

S&P Global reported that the incident ould make some fintechs take into consideration bringing sure elements of their funds stack in-house, together with card-issuing. This would get rid of the necessity for reliance on third-party options.

However, an nameless business advisor informed the publication that this might not be a optimistic factor for fintechs: “that would be a very slow, cumbersome process involving additional regulation and licenses, and it would act as a drag on the industry,” the advisor defined.

Instead, what might must occur is a complete re-evaluation of the techniques which might be presently in place to forestall this sort of factor from occurring to start with.

Indeed, “Wirecard’s collapse will catalyze the innovations of new accounting methods and RegTech,” mentioned Sky Guo, chief government of Cypherium, to Finance Magnates. 

Sky Guo is the CEO of Cypherium and founding associate of the OMFIF Digital Monetary Institute and Faster Payments Council.

Guo prompt that blockchain and central financial institution digital currencies (CBDCs) might be part of this: “for example, blockchains can be used to implement a triple-entry accounting system, which establishes an unalterable audit trail. CBDCs’ strong regulatory compliance will effectively make fraud more difficult and will tremendously help regulators to fight financial crimes,” he mentioned.

”Financial service firms should proceed to deploy and improve surveillance and compliance applied sciences.”

Robert Goldfinger, Certified Anti-money Laundering Specialist (CAMS) and monetary crimes skilled, additionally informed Finance Magnates that whereas the shutdown might have had vital results on end-users, the debit card cutoff is simply a symptom of a higher systemic difficulty.

Indeed, “while this may be viewed as a major test for the fintech industry it also places a priority on the need for transparency of the exchange of data and information,” he mentioned.

Therefore, Goldfinger argues that “the technology emphasis that is in place needs to center on verification, behavior, and automated auditing.”

“Robust communication channels must exist between financial institutions internal auditors, external auditors and regulators. The power and efficiency of the utilization of automation and artificial intelligence to uncover, reveal, identify and act on anomalies and red flags should be recognized.”

In different phrases, “the key point is all these financial institutions and financial service companies must continue to deploy and upgrade surveillance and compliance technologies to insure protections and regulatory standards are not only in place, but are also working in real-time.”

Robert is a Certified Anti-money Laundering Specialist (CAMS), founding member and former Co-Chair of ACAMS Carolinas Chapter. He serves on ACAMS TODAY editorial job and ACAMS academic job forces.

“One thing that will not change is that criminals and corruption will remain a constant.”


Finance Magnates reached out to Wirecard for commentary on this story, and acquired this link in response. 

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