Wirecard’s Thrilla in Manila: The Story so far (1)
Thursday, 18 June 2020, marked the preliminary peak of the story of Wirecard, the German DAX-listed payment processing company. That day, auditing company Ernst & Young refused to sign-off the annual report as their hopes to find roughly two billion Euros that are missing on the balance sheet have vanished into the thin air of Manila/Philippines: The two banks BDO Unibank and Bank of the Philippine Islands where the funds should have been deposited declared in two indpendent statements that in fact they do not have any business relations at all to Wirecard.
For many years now, the story of Wirecard has been packed with discussions over its accounting proceeding and its business model. In particular the Financial Times has issued several analyses in this regard over the years (see HERE). Some of the Financial Times accusations lead to a special audit conducted by KPMG. The translated report (original is in German) on the results of their investigations has been published at 28 April 2020 and can be found HERE.
Below, we want to shed some light into the current situation, starting with a short explanation of the business model of Wirecard (necessary to understand the current issues) to then going on with a short explanation for what could be explanations for the missing money.
What is the business model of Wirecard?
Wirecard is a payment processing company that provides infrastructure and services for online payments. For relevance of the current issues in particularly three different aspects of the business model are to be discussed:
First, and this is the original business of Wirecard, the company places itself somewhere into the payment circle of online transactions. When a customer buys something from a merchant, its bank transfers the money (often via credit card companies) to the so called acquirer (this is Wirecard) which then transfers the money with a time lag to the merchant. The acting of an acquirer is necessary as it provides insurance for e.g. the credit card companies against the merchant not delivering the goods, or similar cases. The acquirer optimises its risk management by delayed payments (duration dependent on the merchants risk profile) and by staggered payments (keeping parts of the sum as collateral).
It is important to understand that this business is a negative-working-capital business, i.e. the receivables of acquiring business – expected payments from the customer bank or the credit card company – are cleared first by a cash-in to the acquirer and then it takes some time until the liability of acquiring business is settled at later time. Inventories do not play a major role here. Negative-working-capital businesses have the attraction of companies getting pre-financed. The deposits of acquiring businesses are called the merchant float.