The Fall of Wirecard: A Defining Moment for Germany's Fintech Landscape
Wirecard AG, a German payment technology company offering white-label solutions from 1999 to 2020, used to be the poster child of the German fintech ecosystem.
It took the ecosystem years to realize Wirecard’s success was a front for all the illegal deals happening in the background. The house of cards crumpled in 2020 with KPMG’s audit report, revealing a much-complicated criminal structure. To this day, there are still many unanswered questions.
The collapse of Wirecard, once celebrated as a crown jewel in the German fintech ecosystem, has become synonymous with one of the largest corporate scandals in modern European history. The company's downfall shook the financial markets and exposed severe regulatory and governance shortcomings in Germany. This article will dive into the key events surrounding the Wirecard scandal and its significance for the broader fintech landscape.
Note: We’ll keep updating this article with developments. You can check the Financial Times' Wirecard timeline to learn more about how the famous payments group Wirecard became a corporate accountability and governance case study. The developments about the ongoing Wirecard case can be tracked via this link (German only).
Wirecard’s Early Years: A Meteoric Rise
Wirecard AG was founded in 1999 and rapidly became a key player in the digital payment services sector. Offering online transaction processing and issuing credit cards, the company thrived in a world transitioning to digital finance. Its innovative business model positioned it as a fintech pioneer, providing businesses and consumers with cutting-edge solutions for online payments.
Wirecard's initial success culminated in its ascension to Germany’s prestigious DAX index in 2018. At its peak, the company's market valuation exceeded €24 billion, signaling that it had firmly established itself as a cornerstone of European fintech. Its ascent appeared unstoppable, with a share price soaring to nearly €200, cementing its position as a rising star in the global fintech landscape.
Before its bankruptcy, Wirecard provided card processing services to retail and online businesses as well as renowned financial service players such as N26, Lendico, Allianz, IKEA, Aldi, Lidl, KLM, Singapore Airlines, and many more.
At the peak of its powers, Wirecard was invited to attend high-level state visits with government representatives and had significant lobbying power, allowing its high-level officers almost direct contact with Angela Merkel and other politicians.
Where did it all go wrong? What happened to the once-celebrated German fintech? Let’s take a look.
Wirecard: The Beginning of the End
Wirecard's troubles began to surface in early 2019 when investigative reports from The Financial Times questioned the company’s business practices. Allegations emerged of fictitious transactions and fabricated financials at Wirecard’s Asian operations, specifically its Singapore office. These reports triggered a sharp decline in Wirecard’s stock price, with the German financial regulator BaFin stepping in to curb short-selling of the stock.
Though Wirecard denied the allegations and responded with lawsuits against The Financial Times, doubts about its financial integrity continued to grow. The company's attempt to dispel concerns by commissioning a special audit by KPMG did little to assuage the market's anxiety. KPMG’s audit, released in April 2020, could not verify the existence of key financial data tied to Wirecard’s third-party partner business, leaving the company’s financials in an increasingly precarious position.
The Missing Billions of Wirecard
The situation spiraled out of control in June 2020, when Wirecard's auditor, Ernst & Young (EY), refused to sign off on the company’s 2019 financial statements, citing the inability to confirm the existence of €1.9 billion that Wirecard claimed to hold in trustee accounts in the Philippines. Subsequent investigations revealed that the missing funds likely never existed, leading to one of the most shocking financial revelations in Germany’s corporate history.
By late June, Wirecard had filed for insolvency, and its once high-flying stock plummeted to mere cents. The collapse wiped out billions in shareholder value and left creditors, including major banks and investment funds, scrambling to recover their losses. This marked the beginning of a broader reckoning for Wirecard's executives and auditors.
Legal Repercussions of Wirecard’s Collapse and a Manhunt
Wirecard’s CEO, Markus Braun, who had long been the face of the company’s success, was arrested shortly after the company's collapse, facing charges of fraud, embezzlement, and market manipulation. Braun, alongside other top executives, was accused of masterminding an elaborate scheme to inflate Wirecard’s revenues and assets while hiding mounting losses.
Perhaps the most dramatic twist in the Wirecard saga was the disappearance of Jan Marsalek, the company’s COO and the man believed to be primarily responsible for its international operations. Marsalek fled Germany in June 2020, evading authorities and his whereabouts remain unknown despite an international manhunt. Marsalek has since been linked to shadowy networks, including allegations of espionage ties to Russian intelligence, further adding to the intrigue surrounding the case.
Post Wirecard Developments in Germany and the Status Quo
CEO Markus Braun, deputy finance chief Stephan von Erffa, and Wirecard's Asia representative Oliver Bellenhaus are currently on trial in Munich for alleged fraud and falsifying financial statements. Here is an overview of the status quo as of June 2024:
Markus Braun’s role seemed instrumental in Wirecard’s collapse. In recent weeks, German prosecutors have charged two other former Wirecard executives, including Alexander von Knoop, who served as finance chief, and Susanne Steidl, its board member for product development.
Munich I Regional Court decided that Former Wirecard CEO Markus Braun and the two former board members Susanne Steidl and Alexander von Knoop must pay the insolvency administrator Michael Jaffé €140 million in damages.
In the summer of 2024, 3,400 plaintiffs made a €350 Million collateral demand from the former Wirecard auditor EY. EY is accused of failing to fulfill its duties and detect the missing €1.9 billion from Wirecard’s statements.
As of September 2024, Jan Marsalek, the former COO, is still on the run.
The Wirecard case is ongoing, and Markus Braun, the former Wirecard manager, is still in custody in Munich as of September 2024.
In the meantime, the Wirecard whistleblower Pav Gill is busy developing his whistleblowing and corporate reporting start-up.
Wirecard: Impact on the German Fintech Ecosystem
Wirecard’s fall has had profound implications for Germany’s financial ecosystem, exposing glaring flaws in regulatory oversight. The scandal clearly contrasts with the conservative mindset of the German fintech ecosystem and regulators.
The German financial watchdog, BaFin, faced immense criticism for failing to detect early signs of fraud. Despite multiple red flags, BaFin not only failed to act but also seemed to protect Wirecard by banning short-selling of its stock during the initial Financial Times exposés launch.
According to experts, government bodies as well as private-sector institutions, including partners and auditors, failed miserably, contributing to the longevity of the fake façade.
EY, the auditing firm responsible for signing off on Wirecard’s financial statements for years, has also faced intense scrutiny.
Investors have filed numerous lawsuits against the firm, accusing it of negligence in failing to detect the fraudulent activities that had been taking place under its watch.
The scandal has raised serious questions about the role and independence of auditors in corporate governance. EY received a penalty of €500,000 from the Auditors’ Supervisory Board (Abschlussprüferaufsicht - Apas) for breaching professional duty in the context of the Wirecard AG and Wirecard Bank AG audits.
EY has been additionally barred from auditing certain kinds of companies until 2026.
Broader Implications and Fintech Reforms in Germany
The Wirecard scandal has prompted swift reforms in Germany's regulatory framework. The introduction of the Financial Market Integrity Strengthening Act (FISG) in 2021 aims to enhance regulators' powers, particularly BaFin, and improve corporate governance standards.
This legislation ensures that no similar scandal can repeat by providing regulators with more tools to scrutinize financial reporting and placing greater accountability on auditors. For BaFin, this means more competencies and more powers of intervention.
Furthermore, Wirecard's collapse has shaken confidence in Germany’s fintech ecosystem, which had been flourishing in the years prior. The fintech Wirecard was seen as a symbol of German innovation and competitiveness in the financial technology sector.
Its dramatic failure now serves as a cautionary tale, reminding investors and regulators alike of the need for rigorous scrutiny and transparency in the fintech ecosystem.
The regulatory flexibility and the trust towards fintechs have been tarnished since the collapse of Wirecard. BaFin’s actions revealed BaFin’s zero-tolerance policy, pushing the entry barriers higher for new financial service providers and increasing the burden on many fintech start-ups and scale-ups.
Numerous banks and fintechs active in Germany have been warned or fined since 2021 for more minor or more significant deficiencies, and some of the more known ones have been subject to additional supervisory scrutiny and new customer onboarding limitations.
Regardless of whether these fines and measures were apt, they no wonder created a state of “regulatory anxiety” for fintech entrepreneurs, making the German market less attractive for newcomers and making it harder for the existing companies to survive, especially in an economically challenging environment.
Indeed, many local start-ups have turned to foreign European regulators in the last few years for licensing, and this is not a coincidence.
Learnings from the Wirecard Incident
The rise and fall of Wirecard is a story of unchecked ambition, systemic failures in corporate governance, and the dark side of fintech innovation. The events unfolding at Wirecard undermined trust in Germany as a financial center.
The Wirecard’s wrongdoings clarified another need: the German regulator BaFin’s need for a fundamental change in its culture.
While the company's collapse has had disastrous effects on investors, employees, and the fintech industry at large, it has also catalyzed much-needed reforms. As Germany rebuilds trust in its financial markets, the lessons from Wirecard's downfall will undoubtedly shape the future of fintech oversight and corporate accountability.
In the micro sense, Wirecard’s collapse is a warning to all start-ups and financial service providers. Wirecard clearly showed that trust is good, but control is better. In this scope, companies should provide governance structures resembling “checks and balances,” preventing any management position from having too much power.
Companies active in finance, whether big or small, should additionally implement reporting tools to enable smaller functions to be heard and aware of the smaller issues, which might indicate the existence of more significant problems.
Would you like to establish or grow a fintech or a bank in Germany in the post-Wirecard era? Please feel free to contact us to avoid costly learnings and to receive clear and concise GTM navigation.
