When fintech fails
28 June 2020
The conversation we should be having
Over the last couple of days the fall out from Wirecard's alleged fraud has gone from a niche industry scandal to a full-on disaster. Hundreds of thousands of UK consumers have been hit, suddenly told on Friday that they were frozen out of their accounts. Without warning. On a Friday, around payday, in the middle of a global pandemic.
Whenever a big industry story breaks there's plenty of coverage and plenty of conversation. When Revolut was accused of taking advantage of its staff, we talked about it. When Monzo announced there'd been a PIN security breach, we talked about it. A week ago, when Wirecard acknowledged that €1.9bn of cash on their balance sheet probably doesn't exist, we talked about it.
But I don't think we're talking enough about the knock-on impact of Wirecard's demise. The impact not just on us as an industry but on the wider public.
No money for food
Mums unable to feed their children. Young people unable to pay rent. People unable to receive their benefits. Payments due for essential items like insurance and bills, all frozen.
What's happened to Wirecard has directly made these already vulnerable people more vulnerable.
I want us as an industry to acknowledge these stories. I want us to be uncomfortable about them. I want us to talk about them.
How did we get here?
On Friday morning the FCA put a freeze on Wirecard's UK subsidiary, Wirecard Card Solutions (WCS). It was because the German parent company accused of fraud had filed for bankruptcy.
The FCA has done this to prevent consumer funds being underhandedly used to pay off the German parent company's debts. This action is designed to protect consumers. And presumably the sudden nature of the freeze was to prevent tipping off any fraudsters still employed by Wirecard.
All makes sense so far. The right actions for the regulator to take.
But the direct consequence of Friday's freeze was that, within minutes, customers at all the 'agent' businesses that use WCS to process payments found that payments were blocked and they were unable to access their money.
That's hundreds of thousands of consumers using products like Pockit, U Account, Curve, ANNA Money, Soldo, Dozens and currency exchange cards such as FairFX. Most devastating are the effects to those using Pockit and U Account, both designed for people unable to access a traditional bank account. These are people on low incomes or benefits who probably use these prepaid cards as their primary account.
The blame game
Users are extremely angry. You would be too if your bank suddenly said to you that you no longer have access to your funds because of something entirely out of your control, with no idea how long if or when you'll get that money back.
Of course, they're blaming the brand that they associate with the card. They're blaming Pockit, they're blaming U Account, they're blaming ANNA Money – and whoever they see as the company that holds their money.
Trust in these brands is now at an all-time low, with users confused as to the answers being given out about the link to Wirecard and accusing these companies of knowing more, sooner.
The reality is that none of these companies would have known anything about the FCA's freeze until it was announced on Friday morning. Again, if the FCA had told them beforehand it could have compromised the protection of consumer funds by tipping off any Wirecard fraudsters. So the first time these companies would have feasibly been able to tell their customers would have been immediately after the freeze was announced at 10am on Friday.
Curve sent out an email within a couple of hours. Within a similar timeframe, ANNA Money sent out a tweet, 'urgently recommending' customers withdraw funds from their account as soon as possible. Pockit and U Account told customers after 1pm.
These are fairly fast responses, although arguably these companies should have had the email drafted in advance as part of their disaster recovery plans. Then they could have sent them out at 10.15am rather than a few hours later. But in the grand scheme of things, the effect would have been the same.
Who's really to blame?
Wirecard is to blame. It's Wirecard who is accused of fraud on a massive scale – €1.9bn. Their CEO has been arrested and their COO is on the run.
WCS, the UK subsidiary, is hopefully in the clear – but that's what the FCA's investigation under the freeze is meant to confirm. Fingers crossed it does, and quickly.
Undoubtedly there are also problems with the system that allowed Wirecard to carry on this way for so long.
This week the FT reported that EY, Wirecard's auditors, did not check crucial bank account statements for three years in a row, yet they signed off accounts repeatedly.
There may be questions for the FCA about their checks and balances when regulating so-called 'e-money' firms like WCS. Could the FCA have investigated sooner, and without such an impact on consumers? There have been rumblings about potential fraud at Wirecard for years.
Companies like Pockit, U Account, ANNA Money and Curve – these companies are not to blame. They entered into a commercial contract with an FCA regulated entity, WCS, and had every right to expect that the services they were using were legit. After all, both Monzo and Revolut used WCS in the past.
Yes, these companies should all have plans in place in case disasters like this happen. Undoubtedly they all do as part of their duties as an 'agent' of WCS. But they can't reasonably be expected to be able to port their entire systems to an alternative e-money provider overnight – this kind of operation takes weeks at best. And neither can they be expected to have a back-up supplier on hold – commercially that just wouldn't work.
The best that these companies can do is try to be as transparent, helpful and responsive as possible for their users reaching out on social media. Trust is so important to an early stage startup, particularly in finance, and taking a leaf out of Monzo's book in terms of transparency seems the only way these businesses have a chance to keep users onboard through the bumpy ride.
In my book, ANNA Money have been doing the best job on Twitter at least, responding to complaints swiftly and announcing a live stream Q&A with their co-founders this afternoon.
But even if the companies at the coal face are not really the ones to blame, I think they (and any of us working in fintech) have to take some responsibility for the confusion that's led to so much consumer anger.
There's a complex web of suppliers and regulators that serve consumers when we look at e-money. Consumers don't understand who does what – and we don't expect them to – but when things go wrong, it means it's ten times harder to explain.
No prepaid card company would describe themselves as a bank. It's not allowed. But there isn't a simple way to describe the difference to a consumer. I'm sure very few people visit Pockit's website, or ANNA Money's, and think to themselves, "this is an e-money institution!".
So instead consumers see these companies as bank-like, or even as banks. They've probably never heard of WCS. They probably don't understand what it means to be an agent, or how Visa or Mastercard fit into the equation. They probably couldn't tell you that their money is held in a segregated account, and that it's not protected by FSCS.
And what's worse is that it often suits companies to not overly explain these details to the users who are signing up to their products. They don't want to raise doubts in a user's head. Once you get into the detail of how e-money works, it could be really off-putting.
It's confusing. Never mind consumers – lots of us in the industry are confused by this web of suppliers, regulators and rules.
As part of my job at Touco I've been involved in scoping out a new prepaid Care Card product over the last few months (thankfully not with WCS). To do so, I've gone from knowing the bare bones about how e-money works to now having a good understanding of the ins-and-outs of scaling a prepaid card solution.
There's a lot of due diligence involved to become an agent of an e-money institution like WCS. We're going through it now at Touco. But as a company you do have to put your trust into the e-money supplier you enter into a contract with. You have to trust that their regulatory status with the FCA means something.
The good side of e-money
So given the confusion, why do we have e-money institutions at all? Why does this ecosystem exist?
It's important to note that without suppliers like WCS and the regulatory framework that supports them, the financial services industry would not be moving at the pace that it is.
Arguably, Monzo and Revolut would not exist (at least in the same way as they do). Banks would not be being forced by external innovation to rethink their products and their business model. Consumers would have significantly less choice, and would be paying more.
It's been a difficult week for fintech, and particularly for the reputation of the non-banks. Even those who don't use WCS will likely see damage to consumer confidence as word spreads that if your money is on a prepaid card, it could be frozen or there could be a whiff of fraud. Of course, in reality these problems can affect the banks too – but consumer confidence is more likely to be dented in the lesser understood world, and in brands that are upstarts, not decades old.
I believe that the industry needs innovators; it needs e-money institutions. We've seen huge strides over the decade I've been involved in fintech, with products like Monzo's forcing banks to step up their game.
But we should do more. If we really believe in building a new, fairer financial services system then we should react with more empathy when the problems in our industry hit those less fortunate than ourselves.
Over the coming days I hope we can push for practical ways we can help the hundreds of thousands stuck without access to their money. I hope the FCA completes their investigations ASAP, but what if they don't? What can we do?
And over the coming weeks I want us to look inward. What would be the impact on your users and the wider community if one of your key suppliers went offline? What plans do you have in place for that?
Are there lessons we can learn about better explaining what we do, and how, to consumers?
I'm Bailey, CEO and co-founder of Touco. We help carers and those they care for manage money better together, and we're building a Care Card. I've worked in fintech for almost 10 years at places like Monzo, Zopa and MarketFinance. I care deeply about protecting consumers and building better products for people in vulnerable circumstances.
I've not got comments enabled here but I'd love to hear your thoughts on this piece on Twitter, using #WhenFintechFails.
© Bailey Kursar 2021. All Rights Reserved.