Should You Be Careful with Fintechs? Unveiling Wirecard Debacle, Afterpay Milestone

Summary

• The pandemic has exploded the growth prospects of fintechs, with increasing reliance on automation and contactless transactions.
• Fintech space includes crowdfunding platforms, blockchain and cryptocurrency, mobile payments, insurance, robo advising and stock trading apps, budgeting apps.
• A Forbes report reveals that investment in Fintech companies is expected to grow significantly in the next few years, offering outsized growth opportunities.
• Latest Wirecard Fiasco has put the fintech space under spotlight, with concerns raised over its auditor along with EU financial watchdog. While, Afterpay continues to strengthen its position at market darling.

While virus fears aided the adoption and transition to advanced tech models across different spheres including medtech and proptech, it also aided the growing popularity of fintechs amidst increasing reliance on contactless and digital transactions.

The latest buzz in the Fintech space has been the Wirecard fiasco. The German Fintech, Wirecard operates one of the world’s fastest-growing digital platforms in the realm of financial commerce.

Wirecard Debacle- Auditors Accused of Fraud, Stock Plunges

Auditing firm EY has reportedly accused Wirecard of committing an elaborate and sophisticated fraud involving multiple parties around the world in different institutions.

This came soon after the Company filed for insolvency in the Munich district court owing to impending insolvency and over-indebtedness, and its CEO was arrested.

There have been reports that Wirecard was unable to account for over USD 2 billion during the audit of the 2019 financial statements, with false statement concerning escrow accounts.

Unfolding of surprising events has raised fingers on auditor EY who slipped a comment in May on its progress on 2019 financial audit for the digital payment company. Besides, EU is planning to probe German Financial Watchdog over the fiasco.

Moreover, there were allegations of inflating the company's balance sheet and revenues to make it appear stronger and more appealing for investors and customers.

Trading on the Frankfurt Stock Exchange as part of its DAX index, ETR: WDI was down by over 47 % on 26 June 2020 (12:06 PM GMT+2) and quoted EUR 1.82.

Fintech Darling Afterpay under Spotlight

One of the most renowned pioneers of the buy now pay later sector- Afterpay Limited (ASX:APT) has notified about its latest milestone stating that Clearpay, part of APT has reached the mark of a million active customers in the first year itself.

Clearpay now has more than one million active shoppers in the UK using the service, while customer purchasing rate in the UK is noticeably outpacing the US. This makes Clearpay one of the fastest growing ecommerce payment companies in the European market.

Clearpay continues to maintain a strong pipeline of UK leading merchants offering the payment platform and recently launched brands include ISAWITFIRST, Apricot, Elemis, Bare Minerals, Size, as well as Koibird and Sana Jardin.

APT quoted AUD 57.00, up by 0.14 % on the ASX on 26 June 2020.

Ever-Growing Fintech Era

The finance industry is experiencing remarkable and exhilarating changes. Over the past few years, a revolution has been surfacing- formation of an emerging Fintech space (amalgamated from finance and technology), in a bid to amend conservative financial services. The pandemic has further given a positive nudge to the space amidst lockdowns and social distancing restrictions.

Fintech combines latest technological developments with financial services or applications. It is regarded as the ideal zone for tech-savvy and out-of-the-box creative thinkers, who wish to bring about disruption to a market ripe for change. The financial technology has been used for many of the newest technological developments- right from payment apps like PayPal, Venmo to even cryptocurrency.

Fintech no doubt offers great benefits, including quantitative high-frequency trading systems assisting investment firms in enhancing their returns, robo-advisers as a great support to individual investors, intelligent algorithms shaping retail banking and financial apps aiding customers in making better financial decisions.

However, Fintech is a double-edged sword, posing some challenges to be looked at.

Challenges Faced by Fintechs

Despite being in full swing over the past few years and demonstrating impressive growth, Fintech presents several complex challenges.

For starters, there are stringent regulations. Moreover, unlike traditional banking and financial institutions, companies in the fintech industry often are not aware of regulations that they must comply with. The emergence of RegTech, which is the adoption of new technologies to enable delivery of regulatory requirements, is a silver lining in this regard.

Secondly, while some potential users are unaware of Fintech offerings, others bear certain misunderstanding in exact procedures which must be followed to access the Fintech business. Moreover, Customer acquisition is a significant issue for Fintech startups.

Thirdly, raising venture capital financing is not an easy task for Fintech companies as venture capital investors and strategic investors bear a lot of questions in mind like the unique offering of the Company, market opportunity, founder background, potential risks etc.

Next comes in the element of competition. With large existing financial powerhouses, such as Goldman Sachs, Citi and other contenders, a fintech firm needs to differentiate its product and services and ensure defensibility.

Moving on to perhaps one of the biggest reasons that one should be careful of Fintech firms- data privacy, cybersecurity, and data breach issues. Fintech companies often have access to highly confidential information of individuals, such as income details, credit card information, social security numbers etc. This might propel hackers to illegally access Fintech company’s data and if this occurs, a significant negative publicity could be unavoidable by the company.

Bottomline

Amid the associated risks of Fintech, it offers the chance to boost economic growth and expand financial inclusion in all countries. Moreover, market consensus opines that size of Fintech market is anticipated to grow at large scale.

Currently, as COVID-19 wreaks global havoc and disrupts the way we interact and operate business, innovative technologies can be the backbone, providing solutions to ensure business continuity, strengthen health-care outcomes, maintain social distancing, and prevent service disruptions.

So much so, reducing dependence on physical financial interactions and the need for cash, fintech can facilitate government responses and enable secure ways for governments and providers to reach vulnerable populations quickly and efficiently.