Wirecard, the payments group, filed for insolvency on Monday 22 June 2020 after it admitted that €1.9bn in cash probably did “not exist”. On Tuesday 23 June, Wirecard’s recently departed chief executive, Markus Braun, was arrested by police. On the morning of Friday 26 June, the Financial Conduct Authority (FCA) in the UK suspended its permission for Wirecard Card Solutions Limited to operate – impacting a wide variety of different card issuing BIN sponsorship relationships. On the following Monday, the German government terminated its contract with the country’s accounting watchdog, the Financial Reporting Enforcement Panel. The power to launch investigations into companies’ financial reporting is now handed to the BaFin, Germany’s financial regulator. On Tuesday 30 June, the FCA lifted restrictions on Wirecard, allowing it to resume payment activities for its debit and prepaid cardholders. More developments are expected over the next few weeks.
The ramifications of this huge fraud, estimated to be the largest in the last 75 years of German history, will be wide-reaching. The implications for millions of Visa and Mastercard cardholders and thousands of merchants using Wirecard’s acquiring services are only starting to be realised.
Let’s take a look at the issuing and acquiring businesses
Cardholders, using debit and prepaid products issued by organisations such as Anna Financial, Pockit, GlintPay, deVere Vault, the Direct Finance Card, and many other Fintech services saw the following message appear on their mobile app and the respective customer services website - “We’re sorry to report that your prepaid debit Mastercard and all card transactions have been temporarily suspended”. Any funds on these products are being held by Wirecard in a ring-fenced, designated safeguarding account, as required by the e-money regulations, and this account resides with another financial institution. Wirecard was compliant with these operating rules and it means, in the event of Wirecard going bust, money will be protected. There are approximately 50 to 60 different ‘program managers’ using the BIN sponsorship services from Wirecard Card Solutions Limited (WDCS). Many others, offering Fintech card products, including, Osper Card, FairFX (Equals Card), GoHenry, Ixaris and Tide Business Card do not use WDCS and their products remain operational.
Some of the larger challenger banks, such as Starling, Revolut and Monzo, are separately regulated financial institutions that do not rely on BIN sponsorship from Wirecard.
On the acquiring side, Wirecard holds merchant contracts (Wirecard claimed nearly 300,000 merchant clients in 2019), processes card payments and ultimately settles funds into merchant accounts. In order to process payments of Visa or Mastercard transactions, Wirecard holds a license with both payment networks. It is worth taking a brief look at where Wirecard is really playing in this industry segment. Although it was frequently referred to as the German payment company, briefly exceeding the market capitalisation of Deutsche Bank, Wirecard’s position in merchant acquiring in its home market, Germany, is almost negligible. In credit acquiring, it struggled to compete with the large players Payone and Concardis, reaching a market share of approximately 3% (based on the most recent statistics by EHI). For domestic debit card acquiring, an NSP (Network Service Provider) license is needed and Wirecard does not hold one.
The three areas where Wirecard made its name in merchant acquiring
Firstly, it has aggressively invested and expanded in Asia Pacific. In 2017, it took over Citibank’s merchant acquiring business in 11 markets across AP. It also acquired AllScore in China largely to get access to various ‘digital payment licenses’ in the country. Citibank’s portfolio, at the time, contained approximately 20,000 merchants but even then, it was unclear as to how much transactional activity really took place on that portfolio.
Secondly, Wirecard has pushed into European markets with a proposition that cantered around AliPay and WeChat Pay, the two leading payment instruments coming out of China. With the expected increase in Chinese tourists, European merchants started considering the need to enable those two payment methods in their stores. Hundreds of European merchants accept AliPay and WeChat Pay today and Wirecard has been one of the key players in facilitating that move.
Thirdly and most crucially, Wirecard serves as a merchant acquirer to a large number of airlines. Wirecard claimed that they acquire about 90 airlines, including KLM, LATAM Airlines, and Qatar Airways. The timing of Wirecard’s filing for insolvency is unfortunate in the airline sector: many airlines were already holding difficult conversations with their acquirers due to the ticket refund liability borne by acquirers in case of airline bankruptcy. At the start of the COVID-19 crisis, IATA estimated a global amount of $35 billion in liability for potential ticket refunds.
Next steps for Wirecard clients
Many businesses are naturally reviewing the situation around their relationship with Wirecard. The immediate need for many businesses that are contractually connected to Wirecard is to establish an alternative payment infrastructure and create a plan to seamlessly switch away from its issuing and acquiring solutions. How Mastercard and Visa plan to help in switching BINs from Wirecard to another card issuer without the need to re-issue cards can be a messy business. On the merchant side, there are payment gateway and omnichannel acquiring services that can take weeks, if not months, to unravel, re-program and re-test. Identifying new payment providers will take a lot of working around the clock to quickly resolve this situation without further service disruption.
Paradoxically, many Fintech and payment providers were only recently congratulating themselves for navigating through a COVID-19 pandemic that forced many people to work from home and maintain a smooth uninterrupted payment services infrastructure. The Wirecard crisis seems to have put an end to that.
Lead author: Mark Beresford, Head of the Retailer Payments Practice, with contributions from Pascal Burg, Head of the Travel Payments Practice and Volker Schloenvoigt, Head of the Acquiring Practice.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).