“The bankruptcy of the payment service provider Wirecard is now also hitting Germany’s economy financially: after thousands of small shareholders, employees, banks and consumers are now also affected. Just a week after EY’s auditors launched the scandal, the Dax Group has filed for bankruptcy.
EY had refused to test the company’s balance sheet, as a result the share price had slumped by 70 percent, CEO Braun had to resign and his successor admitted that much of Wirecard’s business probably did not exist at all. We are talking about bank balances amounting to EUR 1.9 billion, which Wirecard had shown in its balance sheet, but which does not appear to exist.
EY now assumes large-scale fraud at Wirecard. “There is clear evidence that this is a comprehensive fraud involving several parties around the world and in various institutions with a deliberate intention of deception,” the auditors said in a statement. Such conspiratorial fraud is often a major effort to systematically falsify documents. It is “not possible to uncover this even with extensively extended examination procedures”.
For the 5800 employees that the company has worldwide, the news of the insolvency is a good news. They now have to wait and see whether the insolvency administrator can bail out or sell parts of the group. Employees in Germany are initially expected to receive insolvency money from the employment agency after the opening of insolvency proceedings.
The 15 banks that had granted loans to the company are facing large write-downs in the face of insolvency. According to Wirecard, two instalments are due next week, in the amount of EUR 800 million and EUR 500 million. In total, the credit framework is expected to be around EUR 1.75 billion.
Commerzbank and LBBW alone are involved with EUR 200 million each. Both banks are partly state-owned. According to Bloomberg, DZ Bank was involved in the loan consortium with 120 million euros, while Deutsche Bank was involved with Wirecard with 80 million euros.
Wirecard Bank, which is part of the Group, has not yet been affected by the insolvency. The company is no longer in charge there. Financial regulator BaFin has appointed a special representative at the bank, Wirecard said.
He will ensure that no funds are channelled from the institute into the Group. It is conceivable that BaFin could impose a moratorium on the bank as a next step to prevent investors from withdrawing their deposits in panic.
From the point of view of bank customers, however, there is no need to escape: their funds are protected by the statutory compensation fund and by the deposit guarantee fund of private banks – up to an amount of 19.7 million euros per client. It is not known how much client money is currently available at the bank. At the end of 2018, the Wirecard subsidiary had accounted for savings of EUR 1.39 billion.
It is still unclear what impact the default will have on Wirecard’s actual business: payment transactions. The Group handles cashless payments between merchants and their customers via its own platform. According to previous data, more than 300,000 merchants worldwide use the Wirecard system for such credit card transactions.
Whether this figure is correct is doubtful, given the falsification of the balance sheet in Asia. In Europe, Aldi, Ikea and the airline KLM are among the customers. You could look for other unwinders.
What will be significant will be how the two credit card giants Visa and Mastercard behave. Can they have payments made by an insolvent service provider? Both companies declined to comment. “The stability of the payment ecosystem is always our central concern,” visas say. “We are closely monitoring current developments and evaluating new information as soon as it is made known.” Priority would be given to maintaining the integrity of the payment system and protecting customers.
Reputation of the German financial market “burdened”
Wirecard’s share of payments within Germany should not be excessive anyway. It is true that Germans are paying less and less with cash. Last year, the share of sales of card payments in the retail trade was for the first time more than 50 percent, according to a recent study by the EHI Institute.
But most of the card payments are made through the Girocard, formerly known as a debit card. Wirecard has nothing to do with this system. As a network operator, the company is not permitted to it, according to the banking umbrella association Deutsche Kreditwirtschaft.
“The insolvency of Wirecard AG undoubtedly weighs on the reputation of the German financial market in view of the special circumstances surrounding the event,” the bank representatives write. “But it does not jeopardise the stability and functioning of the German banking system. This also applies to payment transactions, because Wirecard AG is one provider among several and has no system-supporting significance.”
The former CEO Markus Braun and his colleague Jan Marsalek should be able to explain how important Wirecard really is, what is real about the company and what is wrong. Marsalek was responsible for Wirecard’s Asia business, among other things.
The Munich Public Prosecutor’s Office has issued an arrest warrant for him, as has Braun, who has been released on bail of five million euros. His fellow board member, who was fired by the company on Monday, reportedly left for the Philippines.
“As far as Marsalek is concerned, we have found something strange in the immigration database,” the country’s justice minister, Menardo Guevarra, said in a statement. He had instructed the Philippines Immigration Department to examine “some indications” that Marsalek might be in the country.