Fintechs were dealt a hammer blow on Friday after UK regulators suspended Wirecard Card Solutions - one of the sector’s main operators - following insolvency filings by its German parent company.
The shock move prompted up to 70 fintech clients who rely on Wirecard Card Solutions (WCS) — including Curve, Pockit, and Soldo — to suspend operations, simultaneously freezing hundreds of thousands of customer accounts.
“There is total disbelief with the FCA [the UK regulator] for freezing funds on a Friday, especially the last Friday of the month,” said one trade-body member, who asked not to be named. “Just think of the human impact that will have, the unintended consequences,” adding that companies had been unable to pay workers’ salaries or settle their bills.
Indeed, many industry watchers — including Sifted — had not expected the FCA to act so abruptly; an almost unprecedented move. The most likely scenario seemed to be that the FCA would encourage WCS’ sale to a viable parent, to ensure service continuity as well as the necessary guarantees and backing.
"This is exceptionally bad... It's a massive blow for consumer UK fintech," said Michael Kent, founder of remittances provider Azimo.
Similarly, Nigel Verdon, founder of open banking platform Railsbank, told Sifted: “This is the Enron for the fintech industry. It’s going to create a dent.”
Now the Wirecard saga has contaminated the UK’s shores, the key question is what else may unravel and how could this shape the sector’s long-term future?
I think the UK will be hit more than Germany.
Understanding the FCA
The FCA's decision has been a difficult pill to swallow, but the regulator may have had its hands tied.
One possible theory is that the FCA feared 'flight of consumer funds' at the hands of Wirecard's German liquidators. Sifted heard there is a small risk that savvy, parent-company administrators could have overridden e-money safeguarding rules and claimed a right to customers' money, citing UK trust law. Therefore by suspending WCS, the FCA has guaranteed consumers’ funds cannot be “co-mingled” and seized.
“The FCA has probably taken the right decision here even though it’s drastic," said Railsbank’s Nigel Verdon. "There was a very high chance of the administrator coming in to liquidate WCS [thereby risking consumer assets] before a sale could happen," flagging WCS was likely facing independent cashflow issues.
"It’s naive to think WCS is a truly profitable business. A subsidiary like this relies on its parent company to cover a lot of its costs, so if the parents goes bust, it can’t support the subsidiary."
Nonetheless, others maintain that the FCA has overreacted to the demise of Wirecard's German entity.
The trade-body source said that in its recent conversations with the FCA, the regulator had failed to fully grasp WCS’ importance to the UK fintech space, or the impact freezing accounts would have on vulnerable users.
Meanwhile, a fintech founder affected by the blackout argued "the FCA could have handled this a lot better," adding:
"They should have been investigating their approach to [customer] safeguarding a long time ago and been getting comfortable around it. Instead, they were lazy and then freaked out after the German company filed for insolvency."
One fintech investor suggested the move is "also a dig at BaFin [the German regulator]," having lost trust in its overseas partner.
On the brighter side however, one source close to the FCA said the regulator did not suspect the UK subsidiary of being swept up in the accounting misdemeanours of its parent.
The fintechs who relied on WCS have been temporarily paralysed. Barring Curve, it could take weeks for its peers to migrate onto new providers and to unfreeze affected funds (unless the FCA backtracks). Several will have to reissue cards, too.
As such, customers affected by the blackout — potentially reaching into the millions — won’t be forgiving, said Azimo’s Michael Kent.
“The immediate impact for those that rely on Wirecard [Card Solutions] could be terminal."
Indeed, one user of Tymit — a challenger credit card affected by the WCS blackout — said to Sifted: "Bloody fintechs... I'm going back to Santander."
But the ramifications and blow to credibility could go far deeper, Kent said.
"It's not good for the wider ecosystem either. It's blown consumer trust across the sector... Everyone’s going to say 'I’m not going to put all my money there'."
Comments to a similar effect have been plastered across social media.
"This is a sad day for fintech and financial inclusion... This is a blow to the whole industry," Todd Latham, an executive at CurrencyCloud wrote on LinkedIn on Friday after the news broke.
Another fintech and accounting expert, who asked not to be named, told Sifted they expect more bad news to come for the Wirecard saga.
"The UK will, I think, be hit more than Germany... There's been a lack of due diligence throughout the sector, unfortunately."
The silver lining, the source added, would be if "legit fintechs and challengers step up... and help the unbanked who are now stuck with no accounts and benefits."
Is the fintech party over?
It's not just consumer doubts; the FCA has also been given a wake-up call, according to Azimo's Kent.
"Regulators are going to get tough now."
In particular, Kent noted it was likely the FCA would take further action to reinforce governance at other e-money licence holders, including Revolut and Pockit, to guarantee they are separating users’ funds.
"Are these companies too big to fail? Do they touch too many people? The regulator really needs to understand that going forward," he added, noting this could bring more red tape and compliance obligations.
Fintechs are also hopeful the regulator will finally implement rules that fully safeguard e-money accounts.
Meanwhile, the FCA could introduce tougher rules for Wirecard's UK peers; third parties who fintechs rely on to outsource their card issuance and licensing.
These so-called "fintech enablers" have been a key part of the sector's growth by allowing consumer fintechs to focus on user experience and features rather than core technology. But without fresh reassurances, they look like a vulnerability, said Ruth Foxe-Blader, a partner at Anthemis.
“Startups must continuously vet all of their partners, or else they need to build functionality in-house," she told Sifted.
"This might feel, at times, like it's at the expense of growth and cost. But, in a regulated industry, there is no alternative to compliance."