It’s often said that trust takes years to build and seconds to break. One way or another, the fraud allegations directed at digital payment technology firm Wirecard last week will have dented some consumers confidence in electronic (ePayments) and mobile payment apps. But despite the inconvenience caused, it also demonstrates how digital services backed by regulated financial institutions can be equally as safe as using credit and debit cards.
The German company filed for insolvency on 25th June after it emerged that EUR1.9bn of cash was missing from two accounts it held in the Philippines and its chief executive was arrested. The revelation led to millions of customers belonging to up to 70 payments providers – including Pockit, FairFX, Curve, CardOneMoney, Anna Money, Payoneer and Revolut as well as Wirecard itself – having their accounts and payment cards temporarily suspended as regulators ordered Wirecard to freeze its operations while they investigated further.
As of 30th June, most of those restrictions have either already been (or will shortly be) lifted, and customers now have access to e-money held in their pre-paid digital cards, payment services, mobile apps and online accounts again. Limits on where Wirecard can hold customer cash and its ability to transfer its own assets remain, however. Wirecard itself has pledged to continue its business operations while it figures out a way to deal with the fallout of the incident and get its operations back on track.
German financial regulator BaFin also faces global criticism for failing to spot problems sooner, whilst several enquiries into an incident that Wirecard auditor EY described as a result of sophisticated global fraud are also on the cards. Auditing concerns have long been expressed, with UK newspaper the Financial Times having reported suspicion that a senior executive had falsified accounts and was engaged in money laundering in January 2019 after rumours of a Singapore investigation.
Broader business operations show resilience
Once valued at EUR24bn, Wirecard is now worth an estimated EUR400m after the value of its shares plunged from EUR104 on 17th June to EUR1.28 on 26th June. A EUR1.9bn accounting scandal would normally be enough to finish off any business, but Wirecard at least seems to feel it has sufficient sources of alternative revenue to pick up the pieces and ride out the current storm. Only time will tell if the brand has suffered irreparable damage, but there is no doubt that the company has multiple strings to its bow.
As well as providing the digital payments infrastructure that underpins third-party digital and mobile payment providers, the company also holds a German banking license (Wirecard Bank) alongside licenses from credit card companies Visa and Mastercard. It also has contracts with digital wallet providers including Alipay, WeChat Pay, Apple Pay and China UnionPay, and launched its own mobile payment app – boon – in Europe in 2015. Based on a virtual Mastercard, boon offered the ability to conduct smartphone/tablet-based transactions via NFC as well as online retail and peer to peer payments.
Another mobile app owned and operated by Wirecard subsidiary Wirecard North America (formerly Citi Prepaid Card Services business prior to its acquisition in 2016) was launched in the US in August 2019. It allows North American customers to track their balances and payment activities and for third party payment providers to co-brand the mobile application. Customers include cosmetics marketing firm Mary Kay, insurance company Liberty Mutual, WestJet and Izuzu Trucks.
Indeed other providers have recently followed Wirecard in building what they see as more sustainable payment businesses that extend beyond mobile transactions and into credit and insurance services. Stripe, for example, launched a corporate card and a lending product (Stripe Capital) geared towards small businesses in the US in September 2019.
In India, various mobile payment providers withdrew from the market after saying their business models had become “unviable”. In contrast, others – notably MobiKwik, Paytm and Amazon Pay Later – have introduced additional services such as credit and insurance to make their portfolios more sustainable. PayPal and Square too have launched cash advance facilities to complement their payments businesses, while providers like Kabbage in the US are coming the other way by adding mobile payments to their small business loan services.
Good and bad for mobile payments
There seems little doubt that the suspension of so many eMoney accounts adds fuel to the distrust of mobile payments amongst some consumers. But it also demonstrates that funds backed by regulated banks, credit card providers and financial services companies can be adequately protected by law if proper scrutiny is applied.
In the US research published by NGO, The Pew Charitable Trusts in October 2019 provides some crucial insight into consumer concerns over mobile payments even before the Wirecard scandal. Its report Are Americans Embracing Mobile Payments? – based on a survey of 1200 US adults conducted by the GfK Group in 2018 and 2019 – found nearly 30% of respondents had on occasion avoided initiating mobile payments because of concerns about loss of funds for example.
Yet other Pew findings suggest it is perhaps the perception, rather than the reality, of electronic payment services which is most likely to undermine confidence. Another 35% believed that mobile payment that uses a credit card was well protected compared to 61% for a credit card on its own, even though both are subject to the same financial safeguards infrastructure and consumer protection as other transactions conducted with those cards (more than 80% of mobile payment users surveyed said they had connected a bank account or credit/debit card to their mobile app).
Payment service provider impacted by Wirecard’s application for insolvency have been quick to highlight the distinction. Curve (which announced earlier in the week that its technology would underpin the revamped version of Samsung Pay) pointed out that while Wirecard provided the infrastructure for its service, it did not hold any of its cardholders money while Curve was already in the process of moving to its own systems. Digital banking app Anna Money also reassured customers that their money was ringfenced in a dedicated Barclays Bank account.
Pew’s research also highlighted the challenges to mobile payments rooted in often complex and ambiguous regulatory environments that providers operate, as well as a lack of consistency in dispute procedures amongst mobile payment apps. If the Wirecard scandal now pushes regulators into paying closer scrutiny to the affairs of payment providers which leads them to introduce new rules that encourage them to be more open and transparent about the financial protections and consumer rights they deliver, it may prove far more beneficial in the long term.