2020’s second quarter ended with a bang last month, as the scandal around Germany’s payment technology platform, Wirecard, rocked Europe’s financial and technology markets.
Essentially, accounting firm EY declined to certify Wirecard’s books for 2019, as it seemed to have discovered a financial hole of €1.9 billion in the company’s accounts. After a little bit of back-and-forth between Wirecard, EY and the German Federal Financial Supervisory Authority (BaFin), at the end of June, it emerged that the money in all probability never existed in the first place – but had been accounted for not just in 2019 but also in the years beforehand.
This cacophony of failures stretching from EY’s accounting oversight to BaFin’s admittance of ignorance is now also entertaining politics, as Berlin’s Federal Parliament is calling for an official inquiry. The Wirecard Group subsequently applied for insolvency and is now in the process of having its asset parcelled up for the highest bidders. The victims of this scandal are Wirecard’s small- and medium-sized business clients, as well as a host of payment-process partners and vendors.
Was this a one-off scandal within a specific regulatory and market environment? Or are there lessons to be learned by the wider fintech and finserv communities to avoid this story’s repetition?
You can say many things about Germany and the Germans but “digital revolutionisers” isn’t one of them. Historically, Germany has been slow to digitalise – both in terms of institutional adoption and in terms of infrastructure. A lot of this has to do with a traditionally cautious, measured business culture as well as with high levels of reservation around data-protection. However, on a business level, this has resulted in something almost akin to a digital inferiority complex – the knowledge that Frankfurt’s banking and Berlin’s start-up scene would never be able to play in the same tech-league as Silicon Valley or Canary Wharf.
Enter Wirecard. In this particular environment, it quickly became a shooting star among digital start-ups, because it was innovative enough to compete with its Anglo-American rivals. With hindsight, there is a strong argument that a lack of knowledge about fintech and digital payments and thus a lack of competence resulted in a regulatory approach that was far too hands-off to really deal with the scandal. For example, BaFin’s team investigating Wirecard after EY’s early warning signs wasn’t really a team at all – it consisted of only one person.
How can these scenarios be prevented without curtailing important features of digital innovation, such as open banking? The answer lies within each business individually, in the relationship between the strategy drivers and the compliance function.
"Had strategy and risk/compliance worked hand-in-hand, the scandal would likely never have happened in the first place."
Recently, I was fortunate enough to work on a global intelligence project within 6 Group, which examined the usual set-up and the typical relationship between strategy and risk and compliance leaders in a bank, fintech or other financial service company. The most successful of these organisations are led by influential “doers” with proven track records in both offices and these people have to be in constant and amicable communication with each other.
In risk and compliance (typically in the office of the CRO or the CISO), we have the relationship managers of the respective regulator – their influence lies within being exposed to how laws are applied to their sector. Strategy, whether that is the Chief Executive Office or a dedicated Chief Strategy Office or similar, takes the input from compliance and adds it to an actionable and sustainable road map. Everything in a business, especially a fintech, spawns away from this relationship. The product, its commercialisation, the company’s hiring strategy are realistically all based on the risk and compliance person knocking on the CEO/CSO’s door and giving her or him a few decisions to make.
I would argue that this principle was either missing or fundamentally flawed at Wirecard from the very start. Had strategy and risk/compliance worked hand-in-hand, rather than in ignorance of each other, the scandal would likely never have happened in the first place. Risk/compliance would have been aware of murky financial acrobatics far earlier than an external accounting firm could ever have been in a position to be and, doing its job effectively, would have advised the executive leadership to sort it out.
Would you bet your house on this being impossible in your company? If you are unsure whether the relationship between strategy and risk/compliance in your business functions effectively, this may have several reasons. Perhaps the company has structural flaws, in that accountability lines go in wrong or ineffective directions; or the problem lies within a lack of amicability between the two drivers, in which case there might be a personality issue with either one. In either case, the first priority should be to work towards a solution.
If it is a structural problem, you may consider investing in an optimisation intelligence study of your sector and regulatory environment. An excerpt report of the aforementioned project is available free of charge to give you an idea of what such a study would look like and what it could deliver (feel free to get in touch if you would like a copy).
If it is a clash of personalities, the solution would most likely lie within an impartial behavioural and cultural assessment of both functions and, if the problem lies with an individual leader, subsequently a highly confidential Executive Search to find the best replacement in the market.
All of these missions are bread-and-butter for 6 Group’s Financial Services practice and they result in short- and mid-term structural adjustment and, in many cases, leadership replacement. This in turn enables better-informed personnel and hiring decisions.
In combination, it could make the difference between sustained and “clean” success – or a Wirecard-like catastrophe several years in the future.
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Through competitor and market intelligence projects examining the best-in-class organisational structures, to assessing and developing the key leaders in your business, 6 Group helps its clients achieve their transformational goals.
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