What the Wirecard scandal means for your finances

The truth is (probably) out on an extraordinary scandal but its legacy is only just emerging

The company has been accused of falsifying accounts after a £1.2bn hole was uncovered (Reuters)

Despite Covid-19, Brexit and the constant litany of explosive tweets from Trump, Wirecard has managed to be big news over the last few weeks. It’s a complex tale that ranges from consumer loss to wild rumours of spying.

So what has actually happened with Wirecard? And why do you need to know?

What is Wirecard?

The company is a payment processor, it enables companies to accept credit cards and digital payments such as via Paypal and Apple Pay, whether online, through mobile or in stores.

It has also launched additional services that help companies analyse trends and glean commercially useful data from its transactions, to help increase sales.

Here in the UK, the company provided the underlying payment services for a wide variety of cards, including FairFX, Pockit and Curve. Some of those were travel payment cards, designed to help people spend safely abroad.

Others were cards that allowed people to access benefits, meaning they were essential to their daily lives.

What happened?

At the end of last month, the company was forced to admit there was a £1.7bn hole in its accounts, after auditors refused to sign them off.

It initially said that the money was being held in accounts in the Philippines but eventually admitted that the money simply did not exist.

Shortly after that shocking revelation, Wirecard filed for insolvency and its shares dropped in value by almost 100 per cent, taking it from around £21.5bn just two years ago to less than £360m at the end of June.

That would have been big news at any time but then just two days after the revelation that such a substantial sum was missing and probably didn’t even exist, the company’s former boss Markus Braun was arrested on suspicion of manipulating the markets and false accounting.

Prosecutors in Munich declared they were widening their investigation to other executives at the company and went on to arrest two more.

How did it affect real people?

No matter how massive and removed a financial firm may seem from the lives of actual people, an event like this inevitably has an impact.

And with Wirecard, that impact was painful for many people, many of who didn’t even know they were connected to the company.

When the company filed for insolvency, here in the UK the Financial Conduct Authority (FCA) ordered all regulated activity to stop. That meant that millions of prepaid card customers were then left unable to use their cards.

This was particularly problematic as a number of UK-based cards and apps that do not have their own banking licenses had been using Wirecard for their processing, leaving many people unable to access their cash – including vulnerable people unable to access their benefits payments.

Martin Lewis, founder of MoneySavingExpert.com, said that hundreds of thousands of accounts had been frozen, leaving many people simply without funds and in a state of “extreme anxiety”.

What was particularly alarming for many was that there was no real guidance as to when that freeze would be lifted.

By the 30 June that freeze was lifted but it highlighted how changing banking and payment methods could leave customers vulnerable in the future.

Is my money safe?

Lots of the companies affected by the freeze on Wirecard-enabled transactions issued statements to their customers reassuring them that their money was safe. However, it does show the importance of fully understanding what protections are in place.

Electronic money or payment services are not covered by the Financial Services Compensation Scheme (FSCS) so there is no system in place to automatically reimburse customers if things go wrong.

However, the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 set out rules for how payments firms should conduct their business, including holding customers’ money separately from its own.

If companies follow those rules here in the UK, then customers’ cash ought to be safe. But this scandal has shown that many customers are not aware of who holds their money or enables their payments, just the brand they deal with directly.

Will this change anything?

The FCA says it is now consulting on new requirements for firms that outsource payments to strengthen their operational resilience. That could mean we see more clarity or stronger protections for consumers in the future.

Certainly, there seems to be a growing consensus that more regulation is needed.

Dan Scholey, COO of Moneyhub, says the situation must change and that Open Banking rules would enable that.

He says: “The repercussions from the collapse of Wirecard have been felt by hundreds and thousands of consumers who had been caught up in the net of the FCA’s clampdown and unable to access cash from their accounts.

“The domino effect of the freeze shows that people do not have control over their own money when there is disruption from an external provider. But solutions do exist to combat this risk. Payment Initiation Services (PIS) are a core pillar of Open Banking, that allows people to initiate payments directly from any of their accounts to the right destination, be it another account, a merchant or a friend.

“Having bank cards as people’s only source of payment must be a thing of the past. Only then can we ensure that people are not left financially vulnerable when the regulator steps in.”

Agne Selemonaite, deputy CEO at ConnectPay, a company that has used Wirecard for its prepaid card payments, says there should now be an industry-wide conversation.

“In case of a third-party error, companies cannot avoid difficulties within their own service, because of how integrally linked both parties are,” she says. “That’s why currently we are analysing various long-term options to remove any third-party supply from our corporate card services provision, and to ensure that the current situation does not occur in the future.”

Across the globe, the payments industry has grown fast, powering fintech developments and touching the financial lives of many people who don’t even know the names of the companies involved further up the chain – just the brands they deal with personally.

The repercussions of the Wirecard scandal could well shape the development and transparency of the financial services world for years to come.