The implosion of a Fintech Superstar – the current case of German wirecard
By Prof. Dr. Carsten Bartsch, Germany
Managing Partner of DB&P
The past two weeks have seen incredible events – both for the German stock market as well as for the German Fintech scene. An in the center of it wirecard, a Munich-based Fintech that has both seen incredible successes as well as controversies of the past years.
The company’s growth started with former CEO Markus Braun joining the company in the early 2000s. Wirecard quickly grew being a payment service provider – in the early years largely for gambling and adult content webpages. Now, they essentially hold contracts with all the big credit card/payment companies like Visa Card, Mastercard, American Express, Alipay, WeChat Pay etc., but also providing services for firms like Allianz and KLM. It later obtained a banking license and provided an extensive banking as a service busines helping firms like German unicorn N26 develop before N26 obtained a banking license of their own.
Together with the growth, however, more and more rumors about in transparent accounting practices surfaced with a critical article in the Financial Times in January 2019. Nevertheless, the company made it into the prestigious German DAX, kicking out Commerzbank, which was by many seen to signal the changing times where the “classic” banks (like Commerzbank) were being replaced by innovative, tech-driven, agile FinTech’s such as wirecard.
And then came June 2020. On June 17, 2020, wirecard shares closed at € 104,04. Way lower than the all-time high of almost € 200 in 2018, but still. Nevertheless, rumors had been lingering around the 2019 annual report, which the auditors, Ernst Young, refused to testify. They were unable to validate roughly € 1.9 billion on trust accounts held with banks in the Philippines – despite having testified those in the previous years. Also, an additional examination by KPMG did not clear up the dispute.
On June 18 then the publication of the annual report was cancelled a second time, making the stock lose roughly 50% of its value in one day. From there on, the deep fall took its way – an unprecedent event in the German stock market.
Wirecard announced, that those accounts, which make up a significant portion of wirecard´ s equity, do not seem exist – at least not right now. This led to the collapse of the share price to currently, June 28, € 1,42.
A German poster Fintech on the way to a penny stock, fueled further by wirecard declaring bankruptcy on June 26 due to fears of illiquidity caused banks closing credit lines of roughly € 2 bill. Euro, whereas the company´s cash reserves are only at around € 600 mil. The very first time, that a DAX company filed for bankruptcy.
It´s certainly a story to follow on for the months to come, but what can we learn from that so far?
1.) Never let greed take over. Did the funds never exist or was wirecard really cheated as they claim (maybe by dubious investors)? Honestly, it doesn´t matter! As an entrepreneurial company, your main asset is not money, but the integrity of its leadership and management. You break that – you break the company!
2.) As a top manager, you are responsible for managing stakeholder interest. Here, the management was focused on maximizing shareholder value through blitz scaling – providing the equity to enable further external bank financing). And once again, this approach failed (like in most other Soft Bank investments like WeWork). And as always, it is other stakeholders like employees’ customers, banks and the entire financial community who are left behind and betrayed. And we already see many of the customers searching for alternatives to wirecard.
3.) We need trustable regulators and auditors! Wie Ernst Young now saying, that only deep and solid accounting procedures would have uncovered the fraud, the financial community is left clueless. In a case where almost 25% of the firm´s equity is, on trust accounts in the Philippines – how many more warning lights do you need for a deep and solid look?
We see a negative case of companies growing too quickly and focusing too much on growth instead of compliance, does this put all the industry in a bad light? Sure now, but it reminds us to always look behind the corporate scenes and the flashy first mile successes – especially in dynamic industries like the Fintech industry.
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