How the Wirecard Situation Will Impact the Future of FinTech Investing
The financial world was shaken on June 25, 2020, when Wirecard announced publicly that it would be filing for insolvency. Furthermore, it was revealed that $2.1 billion in funds had gone missing from the company’s balance sheet. Even stranger, the company admitted that the funds in question probably never existed at all.
Wirecard’s Missing Funds Explained
These were first uncovered in 2019 by the Financial Times, and now the company is seeking court protection. The effects of this scandal are far-reaching, however. It cast a bad light on BaFin, the financial regulator in Germany, as these events took place under their watch.
Besides this, Wirecard’s subsidiaries might also be affected. These include a card-issuing firm in the UK and a bank in Germany. According to the company, it is not yet known whether they will need insolvency protection as well.
The former CEO of Wirecard Markus Braun, has been arrested on balance sheeting inflation charges. He has posted 5 million euros in bail and is still under investigation. Braun is known for having turned Wirecard from an unknown company to one of the most prominent in Germany.
The company’s fortunes, however, have seen a significant change. Its share price has gone from 100 euros to less than 4 euros due to the scandal. The search for the missing funds even led to the Philippines, where the banks denied knowledge of them.
How Will Wirecard Impact the Future of FinTech?
The scandal not only has implications for Wirecard but also sheds light on the attitudes of regulators. This is particularly true of startups in the fintech space.
The actions of financial regulators to ease some of their restrictions to accommodate emerging industries could prove problematic in the long run. This is especially important as one of their major roles is to act as a watchdog and deter illegal activities.
In the case of Wirecard, however, BaFin did not properly investigate. In fact, it is suggested that they pushed back against accusations of wrongdoing on the part of Wirecard. The reason for this apparently is a desire to nurture the next big fintech startup and thus take precedence over the role of a watchdog.
As fintech firms are taking even more root within Europe, many are finding themselves under-regulated. This means that investors are left with reduced protection and in some cases, there is more protection for the companies themselves than the customers. When Wirecard saw explosive growth in 2016, BaFin went after those who questioned their business practices and authenticity.
This included filing criminal complaints against those who accused them and banning the short-selling of Wirecard stock. In light of the new revelations, it appears that BaFin was unnecessarily coddling the firm. The effects of this could be significant for fintech adoption in Europe as a whole.
Could We See an Overcorrection?
One of the consistently seen actions in support of fintech is the creation of sandboxes for firms in the space. This means that they may test out their products and services free of traditional regulations and then begin more compliance as the firms grow. Most companies in this situation are expected to begin compliance in the future, but the nature of compliance will change.
Because this incident was so embarrassing for BaFin, there is the possibility of an overcorrection. This would involve regulatory bodies becoming harsher on fintech firms or rolling back exemptions that were put in place. The effect of that could be a stifling of the growth of fintech firms.
Then there is the effect on investors. Many might already be reluctant to invest in fintech, and this episode does not help matters. Worst case scenario, some may begin pulling away from fintech out of fear of a repeat of the Wirecard incident.
Fintech Grows Around the World
Despite all the issues, fintech has seen great progress around the world, both regulatory and adoption. In 2019, US Congressman Warren Davidson proposed an amendment to the Securities Act of 1933. The amendment would establish digital assets as a digital class exempt from securities laws.
In 2020, the adoption of fintech saw a boost. This was partially due to the COVID-19 outbreak, which necessitated the use of innovative banking technology. It was also estimated that fintech investment in Israel had doubled in 2019 though the COVID-19 outbreak could threaten this growth in 2020.
Amid reports that fintech revenue will top $500 billion in 2030, Swiss investment bank USB announced the setting aside of hundreds of millions of dollars for fintech investment. This is not surprising as banks that have embraced fintech have reported positive results. Such was the case for Hong Kong banks, according to a June 2020 report.
Will regulatory bodies be harsher on fintech as a result of this? Will investors be deterred? Let us know your thoughts below.