Wirecard, considered until recently one of Germany's fastest emerging blue-chip companies in the fintech sector, has become embroiled in a scandal over a missing €1.9 billion. Yesterday the company filed for insolvency, a form of bankruptcy protection. The scandal follows the arrest and subsequent release on €5m bail earlier this week of Markus Braun, its Austrian chief executive, on suspicion of market manipulation and inflating financial numbers.
From tech darlings…
Wirecard was founded in Munich in 1999 by its now former chief executive, starting out as a payment processing platform focused on internet casinos and erotic websites. Braun, known as an IT wunderkind who styled himself on Apple’s Steve Jobs, grew the company into one of the biggest tech successes in Germany by providing the technology to allow companies and consumers to make cashless payments, and benefitting as demand for online payment processing technology boomed.
Wirecard’s business model was complex, involving cashless payments across a vast network of credit card companies, retailers, and banks. By 2017, it was operating in every continent, with 5,800 staff working in 26 locations, and announced serving 313,000 customers. The company last reported an annual turnover of more than €2bn and making €1m in profit a day at one stage.
Attracting some of the world’s largest investors, it became one of Germany’s 30 most valuable listed companies when it joined the blue- chip DAX index in 2018. Nevertheless, concerns began to be voiced by investors and journalists started questioning the company’s meteoric rise, highlighting inconsistencies in its accounts and the sums it used to buy obscure businesses in Asia as part of global expansion plans.
… to total disgrace
In 2019, a whistleblower alleged that Wirecard owed some of its success to a web of sham transactions which led to a six-month audit by KPMG, who were not able to verify some of Wirecard’s transactions with third parties.
The missing €1.9 billion was supposed to be in trustee accounts at two Philippine banks - BDO Unibank and Bank of the Philippine Islands. The country’s central bank said the cash had never entered its monetary systems and both banks denied having dealings with Wirecard.
The final nail in the coffin came in early this month when auditor EY refused to sign off on the company's 2019 annual report, as it was unable to confirm the existence of cash balances in the trust accounts — which accounted for about a quarter of the company’s balance sheet.
Trading in the company’s shares, which have lost more than 95% of their value within days, was suspended in Frankfurt. Yesterday, shares in the company were changing hands for €2.65, compared with €104 last week. Around €11bn has been wiped off the company’s market capitalization in just a few days.
This led to Braun’s resignation last week, his arrest and Wirecard filing for insolvency in Munich on June 25th, 2020.
BaFin’s baffling behavior:
BaFin, Germany financial regulator, has come under scrutiny for its decision in February 2018 to prevent traders from betting against the Wirecard’s stock.
Several factors might have hindered BaFin and its auditors, EY. One is the complexity of Wirecard's business model, which involved handling cashless payments among a complex network of credit card companies, merchants and banks.
Another is that, unlike a traditional company, much of the value listed on Wirecard's balance sheet was in the form of intangible financial factors such as accounting goodwill and customer relationships.
BaFin president Felix Hufeld admitted on Monday that the Wirecard scandal was a “complete disaster” and criticized his own organization’s inaction.
For their part EY is facing a class action suit by Berlin-based law firm Schirp & Partner and attorney Marc Liebscher on behalf of “aggrieved” shareholders and bond investors. “It is frightening how long Wirecard AG was able to operate without being found out by the auditors,” the law firm’s founding partner Wolfgang Schirp said in a statement (claims against EY could end up rising to more than €500m).
Is this an isolated incident or will Wirecard go down in history as merely the first German fintech to fall from grace? Time will tell.