LONDON (Reuters Breakingviews) - Wirecard is giving Europe’s fintech industry a timely stress test. The German group on Thursday announced it was filing for insolvency, a week after revealing that 1.9 billion euros of its cash was missing. Its collapse will test whether fast-growing and lightly regulated payments firms can fail without damaging customers or dragging down other institutions. For regulators, it’s an overdue wakeup call.
The speed of Wirecard’s demise is dizzying. The company, once worth more than 20 billion euros, is the first member of Germany’s blue-chip DAX Index to file for bankruptcy. For regulators, customers and rivals, however, the real question is what happens next. Though Wirecard has a regulated German banking unit, the country’s main financial watchdog, BaFin, does not directly supervise the parent company. Other payments subsidiaries include a UK unit, licenced by the UK Financial Conduct Authority, and operations in countries including Brazil, Turkey and the Philippines.
It’s not yet clear whether Wirecard’s subsidiaries will also have to seek protection from creditors. If they do, customers and counterparties should in theory be protected. Most transactions are processed quickly, and regulators typically require payments firms to keep client money that is in transit in separate accounts. However, given Wirecard’s apparent willingness to file false financial statements, its respect for other regulations cannot be taken for granted.
The breakneck growth of electronic payments, often handled by upstarts outside the conventional banking system, means the industry has outgrown regulations designed to encourage new entrants. In Europe, a new payments company can get started with initial capital of just 50,000 euros; a new bank requires 100 times that amount. The industry also seems ill-prepared for failure. Banking regulators have spent the past decade forcing lenders to write “living wills” that spell out what happens if they go bust. By comparison, the European Union’s 2015 Payments Services Directive mentions the word “insolvency” just once.
Regulators are catching up, however. Adyen, the 39 billion euro Dutch payments firm, has been regulated as a bank since 2017. The Bank of England’s “Future of Finance” report last year flagged the lack of clear supervision for payments firms, and the need for changes in regulation. Wirecard’s collapse gives those reforms a new urgency.
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