When one of the largest FinTech companies in Europe, and the former “Golden Child” of the German financial sector filed for insolvency last June, it sent shockwaves across the banking community.
Wirecard, a darling of the industry, was unable to pay the money it owed and was in serious trouble after a group of outside auditors identified $1.9 billion in cash missing on its balance sheet.
Merchants need to provide proof of processing not only to show fraud and chargeback rates, but also to show what volumes they truly are processing.
This story makes for a great mystery with a storyline that continues to build, including a missing executive on the run. Wirecard’s behavior comes with some serious consequences and the fallout will trickle down to all of us.
And this wasn’t the first time Wirecard has run into trouble. Within a year of its founding, Wirecard faced challenges. It was then, that Markus Braun joined the company as CEO, injected capital and switched the company’s focus to gambling and processing for the adult market. This brought success and allowed the company to expand into mobile payments and to prepaid and banking services. It also expanded internationally with subsidiaries in 16 countries including the U.S., UK, Australia, Malaysia, India and Dubai.
Last year, Wirecard made headlines after the Financial Times began reporting on suspected money laundering through its Asian subsidiaries. The controversy forced Wirecard to hire KPMG, an outside accounting firm to review the books. Braun announced that KPMG found no discrepancies, but KPMG later reported that they could not validate the profits for 2016 through 2018.
It was the second audit firm called in, Ernst and Young, that identified $1.9 billion in cash on Wirecard’s balance sheet had no back-up proof of existence and the spiral downward began. Wirecard announced bankruptcy, Braun and three other top officers were arrested and the COO, Jan Marsalek, is on the lam with an international arrest warrant out for his arrest.
Looking back at their history, we tapped our compliance team to identify the top four ways their mistakes will impact your business. Here’s what all this means to you:
Dive Deeper Into Your Financial Flow
Because of what happened with Wirecard, expect to see more scrutiny of your business operations. Card brands and acquirers are now digging deeper into the finances of banks, processors and payment facilitators. This is why it’s so important for merchants to work with a regulated entity.
We ourselves are put in the spotlight annually for audits of all our processes and procedures. For example, we’re audited every two years by Mastercard and have our own internal financial audit for all Segpay entities and our parent company.
In the future, expect auditors to spend more time going through the books and gaining confirmation on how funds flow and who they flow to along with required proof of all these steps.
Know Your Customer
It’s very important to know who you’re working with. Know your customer (KYC) or client is a mandatory requirement throughout global financial services for how banks and other financial institutions identify and verify the identity of a client.
Long gone are the days when you simply opened an account with a simple acceptance form on a website. It is the responsibility of the payment facilitator or payment service provider (PSP) to adhere to these requirements and the acquirers who rely on those entities to maintain current documentation. With the issues at Wirecard, expect deeper audits on the KYC held by payment facilitators and PSP.
Currently, we need to validate UBOs, directors, tax documentation and the location of all corporate entities. Any leniencies that acquirers may have been willing to consider in the past are fading quickly as control measures are being more strictly enforced, and regulators are conducting more investigations.
Every merchant, no matter how big or small, must meet those requirements. Card brands, acquirers and regulators will all be validating now. We ensure that our merchants, at least, don’t have to worry, by being fully compliant with all local regulations.
Have Financial Health Checkups
All entities involved in banking and processing need to go through a full financial health check. Merchants need to provide proof of processing not only to show fraud and chargeback rates, but also to show what volumes they truly are processing. Solid business financials will need to be provided showing there is a strong profit and loss statement and balance sheet behind the operation.
Many U.S. acquirers require this today for those merchants going to the bank directly for a merchant account, but this could soon become a requirement for all EU merchants too. Start-ups with no real business financials will need to present either their personal financials to support the merchant account or show that there is capital in the bank to support the business. This is required in the U.S. already but could likewise be added in the EU soon.
The Wirecard mess has people thinking and asking some serious questions. Should payment service providers and payment facilitators do more background checks on their acquirers? If allegations were made well over a year ago regarding Wirecard, why didn’t anyone pay more attention and have back-ups and redundancy plans in place? What about investing in having a back-up processor, so migration is possible if there’s an issue?
Engage in Tighter Transfers
Today it’s very challenging for merchants to get U.S. dollar accounts in Europe. This is primarily due to the extensive reporting required by the U.S. government on EU banks for the movement of dollars. Most EU acquirers do not want to report on high risk or adult entities and our market is slowly getting squeezed out.
One of the claims made against Wirecard is that funds were laundered through its subsidiaries. Pressure on banks for financial reporting on movement of money is expected to lessen, but will put a brighter spotlight on our industry, potentially causing banks to limit risk. The increased focus could also move to segregation of funds, meaning a more watchful eye on the separation of funds from merchant settlements, consumer funds and operations funds.
The bottom line is to make sure you’re working with regulated processors and payment facilitators. As we see nowadays, there is more paperwork and red tape involved in getting a personal bank account; the same applies for a merchant account. More paperwork upfront will allow you to be able to sleep through the night knowing that the organization you choose to do business with as additional oversight.
COVID-19 has already added additional pressures on banks to board new merchants, and larger banks with a heavy card presence can no longer absorb the potential higher chargeback rates of the adult industry. We all know having one less bank in this space will make things more challenging, so we need to think ahead, plan for the worst and demand transparency from those we work with.
Cathy Beardsley is president and CEO of Segpay, a global leader in merchant services offering a wide range of custom financial solutions including payment facilitator, direct merchant accounts and secure gateway services. Under her direction, Segpay has become one of four companies approved by Visa to operate as a high-risk internet payment services provider. Segpay offers secure turnkey solutions to accept online payments, with a guarantee that funds are always safe and protected with its proprietary Fraud Mitigation System and customer service and support. For any questions or help, contact sales@segpay.com or compliance@segpay.com.
