Wirecard (OTCMKTS:WCAGY) illustrates some big problems in the German business machine.
German investors want scale. They want market leadership. They want a position alongside China and the United States.
When they have it, or think they do, they will ignore danger signs to maintain it. That was true with Volkswagen (OTCMKTS:VLKAY). It’s true again with Wirecard.
Wirecard is a payments processor. Like many U.S. fintechs, such as Square (NASDAQ:SQ), Wirecard claimed to offer insight from the data it collected. At this writing, it claimed 5,800 employees and over 313,000 customers.
The problem is that, much like China’s Luckin Coffee (NASDAQ:LK), Wirecard was booking sales that never existed.
Shares that traded for nearly $60 each on June 16 traded June 23 at one-sixth that, a loss of $10 billion in market cap.
How Wirecard Did It
The scandal had been brewing for some time.
Wirecard joined the DAX30, Germany’s answer to the Dow Jones Industrials, in late 2018. At the time it was worth about $27 billion. Under Austrian CEO Markus Braun, now under arrest, it quadrupled its revenue between 2013 and 2018.
To gain scale, Wirecard went in many different directions. Gambling sites? Adult entertainment sites? Online gambling sites? E-commerce sites where cards aren’t present? International payments among dodgy participants? Why, yes!
Entering a country’s payment processing market should be difficult, with banking relationships, financial regulators, and technical hurdles to clear. Somehow Wirecard cleared them quickly.
Or did it? Somewhere, between the computers of various acquiring and processing banks, $2 billion in what now looks like phony revenue was created. At first, Braun said two Philippine banks had the money. They now said they never did. Firms in Dubai, Singapore, and the Philippines which Wirecard said it had banking relationships with now say they never did.
Along the way, Braun also took to calling Wirecard a technology firm and wearing black turtlenecks like Elizabeth Holmes of Theranos. Some reporters say that should have been a warning sign.
Who Got Taken?
Soon after Wirecard joined the DAX, England’s Financial Times began investigating, and Wirecard’s stock price began falling. The FT published its first story in February 2019. Wirecard denied everything, but Bloomberg and The Wall Street Journal were soon on the scent. The FT was back with more detail in October.
While this was going on, Softbank (OTCMKTS:SFTBY) engineered a $1 billion convertible bond for Wirecard and announced a strategic cooperating agreement. Credit Suisse was able to sell the bond issue, Softbank didn’t put in any cash.
Top managers at Softbank’s Vision Fund and Abu Dhabi’s sovereign wealth fund, a Vision Fund backer, funded the deal. The Bank of China was also part of a consortium providing almost $2 billion in revolving credit, along with German and Dutch bankers.
Some of these loans were trading on June 23 at 36 cents on the dollar.
Bankers whose processes and papers have long delayed commerce with red tape now feel good about themselves.
They shouldn’t. Most large banks are deeply embedded in the payments space. JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citibank (NYSE:C) are all big on processing cards for consumers. They also work on the merchant side.
So far investors are treating this as a one-off scandal. Processors like Square, Visa (NYSE:V) and MasterCard (NYSE:MA) were all up on June 23. So were merchant processors like Fiserv (NASDAQ:FISV), which owns First Data, and Fidelity National Information Services (NYSE:FIS), which owns WorldPay.
But risks in the space are increasing. Hackers are an ever-present danger, and now we know insiders can do even more damage. The Global Fintech ETF (NYSEARCA:FINX), which tracks processors, and ARK Fintech Innovation (NYSEARCA:ARKF), which specifically tracks fintech stocks, were both up on June 23.
But all these companies need to be watched closely.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM and WFC.