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Wirecard debacle exposes vulnerabilities in fintech, payments value chain

When regulators ordered scandal-hit Wirecard AG's U.K. local unit, Wirecard Card Solutions Ltd., to suspend all regulated activities in Britain with immediate effect June 26, chaos ensued for the numerous fintechs that depend on the company for debit card issuing and e-money licensing. With the U.K. unit out of action, Wirecard-supported debit cards simply stopped working.

The Financial Conduct Authority lifted the ban late on June 29 to the relief of fintechs and industry lobby groups. But with Wirecard still in a precarious position, fintechs too small to be card issuers in their own right will be coming under pressure to find new suppliers, industry insiders say. The debacle has also highlighted fragilities in the payments value chain, which often involves multiple companies whose interests do not necessarily align.

Damaged trust

Wirecard, which filed for insolvency June 25 following a €1.9 billion accounting scandal, acts as a card issuer and bank identification number, or BIN, sponsor for numerous fintechs in the U.K. and Europe. This allows them to produce debit cards and, crucially, to gain membership to major global payment networks such as Visa Inc. and Mastercard Inc.

Fintechs affected by the temporary suspension of services by the U.K. regulator include Payoneer Inc., the global prepaid cards specialist; Curve, a popular card that lets users group all of their accounts on to one debit card; Crypto.Com Inc. a provider of cryptocurrency-enabled debit cards; and remittance and prepaid card company Pockit Ltd.

Customers affected never stood to lose funds from the sudden shutdown of the U.K. unit as Wirecard does not hold funds on balance sheet, but only provides payment infrastructure.

But for some customers, being frozen out of their account for several days meant that they were cut off from their only source of funds, according to Diane Brocklebank, commercial director at Prepaid International Forum, an industry body. Vulnerable groups, including migrant workers, people relying on charities for assistance during the pandemic and people unable to get a bank account, were badly affected, she said.

The saga continues

Wirecard's U.K. unit may be back up and running again, but for the fintech community, the saga is far from over, according to Pavel Matveev, CEO of Wirex, a company that provides cryptocurrency-enabled debit cards.

"To be honest, Wirecard Card Solutions' recovery was surprisingly quick. While it's definitely good news for European fintech/payment industry, I think we might hear more bad news from other Wirecard Group subsidiaries very soon. Affected fintechs most likely will look for alternative providers despite the recovery," he told S&P Global Market Intelligence.

Wirex, which produces cryptocurrency debit cards, uses Wirecard's Singaporean-based unit Wirecard Asia Pacific Pte. Ltd. — which was still fully operational at the time of writing — for its Asian debit cards, but works with a different firm, U.K.-based Contis Card Solutions Ltd., for its European cards.

Wirecard did not respond to a Market Intelligence request for comment.

Some fintechs were already in the process of moving away from Wirecard before it filed for insolvency. London-based Revolut Ltd., which offers banking services, uses Wirecard for a handful of services such as card top-ups in certain geographies, but acted quickly to switch suppliers.

"When we learned of Wirecard's problems, we migrated the remaining customers to alternative providers worldwide to avoid any potential service disruption," a spokesperson told Market Intelligence.

Curve, also based in London, had already been in the process of cutting out the middleman before the Wirecard scandal, a spokesperson said in an interview. The fintech became a principal member of Mastercard in April, which means that it can bring certain processes such as card-issuing and e-money licensing in-house, eliminating its dependency on Wirecard.

Negative experiences with Wirecard could make some fintechs think about bringing critical aspects of the payments stack, such as card-issuing, in-house, rather than outsourcing them, an independent payments consultant said, speaking on condition of anonymity due to the sensitivity of the matter. But this is not necessarily a good thing.

"That would be a very slow, cumbersome process involving additional regulation and licenses, and it would act as a drag on the industry," the person said in an interview.

Instead of a DIY approach, it would be better if companies instead sought out another reputable card issuer, the consultant said.

Writing in the Financial Times June 29, former Bank of England adviser Huw Van Steenis said the Wirecard scandal highlights a need for greater regulatory oversight in the realm of payments.

"Modern payment chains consist of an increasing number of companies that are interdependent but do not always have shared interests," he said, adding that last year he had recommended that the Bank of England carry out a cross-authority review of payments regulation to reflect "shifting risks and gaps."

The Visa and Mastercard question

Even if Wirecard's U.K. and other local units are still able to keep running, there is another challenge on the horizon.

Visa and Mastercard could revoke Wirecard's licenses with them altogether, according to a recent report from Bloomberg Quint, which would make Wirecard's card-issuing business in its current form untenable.

"We continue to closely monitor developments and assess new information as it becomes available. Our priority is, and will always be, maintaining the integrity of the Visa payments system and protecting the interests of consumers, merchants and our clients," a Visa spokesperson said in an email.

Mastercard did not respond to a request for comment.