Wirecard’s legacy: How might fintech regulation change in the future?

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On 26 June last, one of the most shocking financial news stories of recent years came to light, at least at European level. The bank and payment company Wirecard, which had even managed to enter the select club of the German DAX index, went bankrupt after the auditing firm EY discovered a hole of almost 1.9 billion euros in its accounts. With this in mind, ID Finance shared its vision with Cointelegraph en Español, on how this case could change the regulation on fintech matters.

„It was the chronicle of a death foretold, at least for the company’s top managers, who more than five years ago began to inflate the company’s turnover with false income theoretically deposited in a shell company based in the Philippines. Their goal was to improve the company’s image to attract potential investors and customers,“ said ID Finance.

Given the global impact of the news, many users began to worry that their money had some sort of link to Wirecard, as most of them probably did not even know of its existence. However, millions of customers of popular applications such as Curve, Pockit, and Anna Money, all of whom are Wirecard customers, have been impacted by the bankruptcy, seeing their money frozen and their bank cards no longer working.

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The regulation behind Wirecard
„When Wirecard became insolvent, voices were raised in the financial world calling for greater regulation and control of financial markets,“ explained ID Finance.

„One of the main problems was that the regulators did not classify Wirecard as a financial holding company and therefore did not subject this company to banking control standards,“ they later added

In fact, Wirecard is a fintech that makes use of new technologies to provide a higher quality payment infrastructure to its customers, and which, among other things, has been key in allowing some fintechs such as Revolut to grow and consolidate their position in the market. This characteristic places them outside traditional financial regulation as they are not governed by the same rules and controls as other institutions at European level.

„A regulatory hole that has put on the table the need to audit and control this type of company, and that has even undermined to some extent the credibility of Germany as a financial business centre at a European level,“ said ID Finance.

„However, the Wirecard bankruptcy does not look so much like a failure of a regulatory system, as it has emerged as a result of widespread malpractice that has led to a hole in the institution’s accounts that is difficult for regulators to detect. The good functioning of the company did not make one suspect what was coming, but at least it opens the debate so that this type of banks and companies, with a strong technological base, are put on a par with the rest of the banks at a regulatory level. In fact, as the Latvian Valdis Dombrovskis, vice-president of the European Commission, stated in statements to the Financial Times, formulas are already being sought to strengthen the system and thus prevent this type of situation from happening again,“ they added.

What should consumers look for when choosing their financial service provider?

The Wirecard bankruptcy has highlighted the need to analyse where users have their money deposited. One way to find out which companies are regulated is to check those with a banking license, a legal requirement for companies and banks to do business with third-party money.

However, this does not mean that entities that do not have a banking license are not secure. Fintech can supplement deposit and custody services with other complementary products and services that make use of our banking information. In addition -according to ID Finance-, the recent PSD2 regulation at European level, and others such as the future law for the Digital Transformation of the Financial Sector on which work is already underway, „improves security, opens banking APIs to third parties so that they can develop new applications, allows the exchange of customer data and puts the user at the centre of the banking business“.