Unperturbed by the scandal besieging its German parent company, Verdon notes that the reasoning behind the purchase was clear: “First, it’s a market in which we’re already active and therefore the purchase will help expand our customer base to become the leading Banking-as-a-Service provider across Europe.

“Second, it will bring stability to the market.”

Having previously described the Wirecard saga as the fintech industry’s ‘Enron moment’, it’s not surprising that Railsbank is motivated to quell uncertainty in their own territory. It’s also logical that Railsbank would hate to see such a pool of talent go to waste - or worse, a competitor.

The UK’s Wirecard arm must be differentiated from its diseased parent company, Verdon argues. This is not only because the card-acquiring part of the business (even before the scandal) had a tainted reputation as the go-to for adult sites, gambling or other nefarious activities, “but because it was an isolated business arm, and importantly, the criminals at the top of the business absolutely do not represent the core DNA of the firm’s employees.”

“Wirecard has 5,000-odd employees and only a handful of them are in gaol. Reputation doesn’t concern us as 99% of those workers are good, honest, talented people.”

Wheat from chaff

Railsbank’s purchase agreement covers WCS’ portfolio of clients and cardholders, small pieces of technology and a swathe of employees which Verdon describes as the “key asset.”
This begs the question, if people and not property are the key asset of the transaction, why not simply poach the workers directly and avoid the complexity? “In Germany that’s exactly what we did.”

“A lot of Wirecard staff have joined in Southeast Asia, so we’ve been able to expand our team there because of that. Wirecard clients have come to us in Southeast Asia to go live and we’ve also had to open an additional office in Munich as many of the Germany-based employees decided to jump on the Railsbank train as well.”

Expanding their business in the UK is undoubtedly an attraction, and happily, Verdon insists that WCS’s UK fintechs which were exposed as a result of the FCA’s account freeze in July are very pleased at the announcement.

These existing WCS customers will have to transfer their business across to Railsbank and will need to sign over their bins to a new bin provider, which must be signed off by Wirecard.

Verdon notes that Railsbank did consider buying further into Wirecard AG, but because of the liabilities that sit across the group - with several billion in lawsuits against them - “buying anything that is equity related within the Wirecard Group is massively high risk unless it is totally, utterly insulated.”

On the tech front, Verdon explains that the technology and IP acquired is minimal, and only such that is required to maintain ‘business-as-usual’ for its clients (the stability motif emerges again).

And while these “niche” pieces of technology are needed for the existing WCS customers, over time they will be replaced by Railsbank technology as WCS is wound down.

Building-in compliance

Joanna Jenkins, global compliance director, Railsbank, says that the role regulators play varies in approach and levels of maturity (depending on the fintech landscape it supervises) and calls for simplification.

“In my experience, regulators should focus not so much on making regulation overly complex that it becomes difficult to apply, but perhaps clarifying what they want from the industry and businesses to make it easier to implement.”

Jenkins also believes that the manner in which firms set out on their compliance journey must be diligently adhered to from day one.

“Compliance needs to work hand-in-hand with the product while it is being developed, because applying compliance afterwards is far more difficult. If it is part of the business from the outset, it’s far easier to demonstrate a culture of compliance within that organisation.

“If compliance and sales remain separate without intermingling then there is inevitably going to be friction.”

Approx. €1.9 billion of ‘friction’ in Wirecard’s case.

Can we blame systemic risk?

The ability to optimise compliance in the consumer’s interest as Jenkins describes depends heavily on the industry’s governing regulation and the industry’s ability to effectively implement these regulations.

“Regulation does need to be modified for our industry,” Verdon asserts. “We have systemic risk sitting on top of Wirecard and on top of Railsbank. We have 150 or so customers - 26 of those neobanks - sitting on top of us, which is actually quite a considerable percentage of the UK population’s deposits.”

While calling for a reassessment, he is reluctant to criticise the steps taken by the FCA to freeze WCS funds: “They had a very difficult decision to make when they froze those accounts and they shouldn’t be hung out to dry.

“First, there were funds external to the UK which needed to be repatriated. Second, the Financial Services Act and payment services regulations are out of whack with the Companies Act. So if you’re safeguarding funds, and there is one cent of non-customer money commingling it means creditors can take control - the FCA were in a no win situation and acted to ensure consumers were protected.

“The legislation wasn’t on their side, and they took the best decision that they could to protect consumers.”

What would better regulation look like?

It isn’t the first time Verdon has called for overarching changes to the way the space is supervised, and while he recognises that it’s a (relatively) new market with regulators needing space to learn, regulation really should be moving faster.

“The one criticism I have is that consultation papers should get into legislation a lot faster.”

Verdon’s call to action outlines the creation of a lightweight banking licence (non-lending) that provides the same functionality as the E-Money regulations but much clearer obligations insofar as overseeing a platform with multiple customers and deposits.

“This tool would allow us to meet a higher level of regulation without having to address the higher-risk lending element. I think this would be a better outcome for consumer protection.”

He explains that this would allow firms like Railsbank to work more closely (and effectively) with banks. Currently, banks are reluctant to provide customer money accounts to payments companies as they aren’t credit institutions (with the rigorous compliance thresholds that come with the label).

Such a licence Verdon believes would create a much more interesting and stable market with reduced systemic risk moving forward.

“Our raison d’être in the market is not only to help customers, but it’s to help regulation in the country operate, understand and work with a new business model that is platform banking as a service.”

Is imminent regulatory change a pipedream?

While the Wirecard purchase certainly places Railsbank in a uniquely influential position insofar as their close dialogue with the regulators, the timing of any changes to the regulation remains an unknown. Though the Fintech Review is under way with recommendations expected in 2021, recommendations are just that.

Given Verdon’s concern about systemic risk, when asked whether consumers and businesses interacting with the sector should be confident in their level of trust, he comments: “Regulation will never 100% protect someone’s position. Lehman Brothers was how old before it went bust? Royal Bank of Scotland was around for how long before it bankrupted the UK?

“The outlook for fintech is now different from the ‘baby’ years. We’re at the back end of the toddler years where we’re beginning to walk and very soon we’ll find ourselves being educated in kindergarten which is a very good thing.”