By Alessandro Laval, Business Analyst, Apaylo Finance Inc.
In the last few months, the payments industry, or more specifically the FinTech sector, has come under increased scrutiny as a result of the operations and recent activities of one PayTech firm: Wirecard. Wirecard, a now-defunct payments processing company out of Germany, was supporting many retail companies with the ability to accept and process credit cards and digital payments, like ApplePay or PayPal. Their service supported multiple environments, including in-store, online, and on-mobile applications.
As a result of an initial audit by KPMG in April 2020 and subsequent audit by EY in June 2020, Wirecard became the target of accusations relating to falsifying accounts and money laundering. In the audit by EY, auditors were unable to confirm the existence of 1.9 billion euros. Now with regulatory and governmental investigations underway, it has become clear that the issue is not simply an internal accounting fraud but something much more devious. Wirecard was intentionally misrepresenting the financial affairs of the company to local regulators.
Based on their review, EY stated that “there are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception.” It would be facile to believe that this alleged level of accounting fraud could have been done by a few individuals, however the scale of this deception is leaving payments system users and regulators in disbelief. The result is a reduced level of trust in the PayTech industry, its participants, and the accounting professionals tasked with upholding the truth.
Fraudulent practices are an unfortunate reality in any realm of business. However, the mitigation of fraud goes hand-in-hand with the values and standards expected from the financial services industry. Most, if not all, of the participants in this industry are subject to governmental oversight and conduct regulations. Individuals who use the current array of payment methods and operating rails have a deep trust for these systems and incumbent participants. There is an expectation that these firms will safeguard the funds of their customers and make those funds available on demand.
PayTechs firms are relatively new to this sector and, as such, face a ‘high bar’ to gain trust. Trust is critical if PayTechs wish to continue to expand their suite of financial service offerings and entice a greater number of users to their services. The simple fact that this recent breach of trust was perpetrated by Wirecard, a PayTech firm, will unfortunately have some adverse spillover impact on the reputation of new PayTech industry participants. Despite the fact that there was no direct cause and effect relationship, sadly, the trust in all PayTechs will suffer.
Trust in PayTech firms is critical to continuing to grow this industry. The uptake by Canadians of PayTech services is growing at a significant rate. It’s widely recognized that the emerging suite of PayTech products and services are fast, convenient, and often customizable. The combination of enhanced services, broadened government regulation, and a further commitment to transparency and integrity from Paytechs all contribute to the level of trust necessary for industry participants.
While Wirecard’s behaviour might well tarnish the reputation of more scrupulous PayTech companies, their misdeeds expose key flaws in the industry’s self-governance. Accountants and auditors are two prongs of what should be a robust regulatory apparatus. They have been tasked, across nearly every facet of the business world, with upholding the truth, integrity, and legitimacy of financial documents. These professionals must hold themselves accountable to the highest standards, as must industry regulators. A growing mistrust of financial disclosings continues to persist in the corporate world which, it may be argued, is a direct result of accounting and auditing misconduct. This misconduct tends to favour the big players who look to take advantage of regulators’ laissez-faire attitude.
The payments system is built on sound risk management and counterparty trust to ensure the safe and efficient flow of payments and data. This is why Fintechs Canada is advocating for broad federal regulations for PayTechs as proposed by the Bank of Canada in their Retail Payments Oversight Framework (RPOF). Standardized regulation will better ensure the confidence of consumers, businesses, and regulators in PayTech activities. Further, the inclusion of PayTechs will introduce a much-needed competitive dynamic to the current stable of incumbents in this industry. For these reasons, Canada must move quickly to introduce effective regulations for PayTech firms. Having a trusted, healthy, and vibrant PayTech sector will ultimately introduce innovative products and services that deliver tangible benefits across Canada’s economy.
The same standard of risk management can, and should, be maintained when it comes to corporate integrity. To do so, it is important to hold all participants, including accountants and auditors, in this industry to an unimpeachable standard. This standard, coupled with a comprehensive regulatory framework for PayTechs, market conduct regulations, and reporting requirements, will help the financial industry begin to rebuild the trust lost by Wirecard.