Fintechs expect regulatory backlash after Wirecard scandal

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Wirecard’s collapse in a multibillion-euro accounting scandal looks like an Enron moment for today’s financial technology sector. 

In response to last month’s insolvency filing by Germany’s biggest payments company, European fintech executives and politicians expect a regulatory backlash similar to the Sarbanes-Oxley law that followed the meltdown of Enron in the US almost two decades ago.

Senior fintech executives say they expect European regulators to tighten up their scrutiny of payments companies like Wirecard and suggest a number of ways to stop similar scandals. 

“This is going to open a hornets’ nest in terms of global regulation,” says Ron Kalifa, the former vice-chairman of Worldpay who is leading a review of the fintech sector for the UK government. “Unlike the [UK’s] FCA, most regulatory regimes for the payments sector are fairly light touch and that can’t work when you are moving money around.”

Fintech executives will not say this publicly, but it seems extraordinary to some observers that Germany’s financial watchdog BaFin only regulated Wirecard’s small bank and not its parent company, which was classified as a technology company.

Sven Simon, a German MEP who sits on the economic and monetary affairs committee of the European Parliament, is calling for an independent inquiry: “A system whose safeguards have failed so dramatically must not remain unchanged,” he says.

Fintech executives believe regulation of the payments sector could be tightened in three ways.

The main one is to find a better way for regulators to keep tabs on the segregation of client money. This was a crucial issue in the Wirecard saga. Not only did Wirecard claim to have €1.9bn of client funds in trustee accounts at two Filipino banks that turned out not to know of any such accounts, but its collapse prompted the UK’s Financial Conduct Authority to freeze its UK subsidiary. That blocked millions of customers at other fintechs from accessing their money for four days because they relied on Wirecard’s technology.

One of the fintechs disrupted by the FCA’s action was Holvi, the Finnish online bank for small businesses that was recently acquired by Spain’s BBVA. Tuomas Toivonen, co-founder of Holvi, says that regulators could be given more frequent and detailed information by fintechs about how they have segregated customer funds, allowing them to check more quickly that the money is where it is supposed to be. 

The EU already requires banks to provide segregated accounts to fintechs and Mr Toivonen suggests that banks should have to report on these accounts directly to the regulator. “That would avoid the situation that happened . . . in the Philippines,” he says.

The Bank of England last year promised to open accounts for UK fintechs — so what better way to add an extra layer of security, asks Mr Toivonen, than to have central banks offering segregated accounts to fintechs for their client funds.

Another area that could be tightened up at many payment companies is their governance. Companies could, for example, introduce bank-style requirements for truly independent directors who are approved and guided by regulators.

“In banking you need to have a certain number of independent directors and they are fully briefed by the regulator about their responsibilities,” says Michael Kent, co-founder and chairman of Azimo, the remittance business. 

The final way to improve regulation of the payments sector would be to impose greater scrutiny on larger, more important providers of payments services — just as there is for the biggest banks. “Infrastructure providers may be providing services for lots of other fintechs, not only themselves, so you might say Wirecard was systemically important to the fintech industry,” says Mr Toivonen.

Regulators are already under scrutiny for the way they handled the Wirecard saga. Mr Kent at Azimo has little doubt that the watchdogs will respond with tougher rules. “The tide of regulation is going to continue to flow up the beach and so it should,” he says.

Quick Fire Q&A

Company name: Qonto

When founded: 2016

Where based: Paris

CEO: Alexandre Prot

What do you sell, and who do you sell it to: Qonto puts business finance management on autopilot so small companies can focus on steering their businesses.

How did you get started: We were frustrated by our own business banking experience.

Amount of money raised so far: $152m

Valuation at latest fundraising: N/A

Major shareholders: Tencent, DST Global, Valar, Alven and the European Investment Bank.

There are lots of fintechs out there — what makes you so special: We’re able to walk a mile in the shoes of our clients — European small businesses.

Further fintech fascination

Follow the money: New York-based insurtech Lemonade enjoyed a big bump in its share price on the first day of trading after its IPO. The shares more than doubled, valuing the home insurance specialist at $3.8bn at the close, reports the Financial Times. But despite all the investor enthusiasm, insurtechs like Lemonade still face big challenges to take market share in a very competitive industry.

New frontiers: Payments group TransferWise is to move into wealth management after securing a licence from the UK’s Financial Conduct Authority for regulated investment activities, reports AltFi. The move will bring the company into competition with the likes of Nutmeg, Moneybox and Wealthify.

Follow the money (2): Personal Capital, a fintech focused on retirement planning and investment, has been sold to Empower Retirement in a $1bn deal, says TechCrunch. The company, which offers free financial tools as well as wealth management services, has 2.5m users and $12.3bn of assets under management.

New frontiers (2): French bank Société Générale has spent €100m to buy Shine, a challenger bank targeting freelancers and small companies, according to TechCrunch. Shine already has 70,000 customers, but the tie-up with SocGen could help the company to win more clients or launch new products.

AOB: Zopa has received its banking licence and is about to become a retail bank, reports Sifted; Indian payments group Paytm is to move into insurance with the acquisition of Raheja QBE General Insurance Company, says BloombergQuint; Start-up bank Point has raised $10.5m in a series A fundraising, according to TechCrunch.

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