Britain's hottest fintech startups depend on a €5 billion German company targeted by short sellers earlier this year
There are app-only startup banks (Atom, Monzo, Starling, Tandem); foreign exchange cards (Revolut, SuperCard); spending management apps (Loot, 'U' account, Soldo); business accounts (Tide); accounts for migrants and the low paid (Monese, Pockit); and even a card to help you manage all your cards in one (Curve).
Collectively, these startups have raised hundreds of millions of pounds.
Many of them are remarkably similar. That is unsurprising given that the majority of them all rely on the same German company to provide their infrastructure backbone: Wirecard.
Wirecard, founded in 1999, is a German payments provider that has powered the current boom in startup budgeting and banking apps in Britain. But the company has also been caught up in a short selling attack earlier this year that sent shares diving 25%. Thankfully for British startups that depend on it, the company has recovered.
Wirecard works with British startups such as Loot, Monzo, the "U" account, Soldo, Revolut, and Travelex's money card Supercard. (Earlier this year some users suspected a background link when both Revolut and Monzo experienced downtime simultaneously.)
Wirecard is a payments processor but also has a banking license in its native Germany and has a license to issue cards from Visa and MasterCard. Startups turn to Wirecard for help issuing cards, processing payments, and subletting its banking license.
"They have an idea, they have a business plan and all of a sudden they hit a regulatory problem. That means, it's different from country-to-country, but they need maybe a full banking license. This is where we come in. We can sublicense. They come and say, OK, we need issuing capabilities, so Wirecard has issuing licenses for MasterCard and Visa."
In the case of Monzo, for example, Wirecard issues its cards and holds customers' money in segregated client accounts.
The payment processing and financial services company is little known in the UK, given its model of sitting behind the consumer-facing brands. But von Waldenfels says the UK "one of the more interesting markets overall" for Wirecard.
€216.6 million of Wirecard's €771.3 million revenue in 2015 came from Europe, excluding Germany, and the UK is described as an "important sales market" and one of three "base locations" for the company in Europe in its annual report.
Von Waldenfels says: "It's the mindset of the people and also the infrastructure. The merchant in the big city and the mindset of the user are more advanced than in other countries."
He won't describe how exactly Wirecard makes money on its UK deals, saying: "There is no standard package because there is no standard fintech. There are always setup fees but it always depends - is it a transaction business, is it a credit card, is it a debit card, are they using our banking license capabilities."
But he adds: "There will always be a fixed fee and a transaction fee."
As well as a banking license in Germany, Wirecard's UK subsidiary holds an e-money licence from Britain's financial regulator the FCA. A spokesperson said this means the company has "flexibility irrespective of the terms of the UK's separation from the EU."
'Untrue and slanderous allegations'
Wirecard is listed on Germany's technology index TecDax and currently has a market cap of just over €5 billion. It currently processes around €42.5 billion worth of transactions per year and works with close to 22,000 merchants around the world.
However, the company was mired in controversy earlier this year. The company was targeted by short sellers and faced an aggressive research report against it in February, which sent its share price tumbling. A previously unknown research firm, Zatarra Research, claimed it has uncovered evidence that linked Wirecard to money laundering of betting proceeds from offshore poker sites back into the United States, where online gambling is illegal.
Wirecard's CEO Markus Braun told Reuters shortly after the report was published that the allegations were "based on insinuations and false conclusions." The company also called the claims "untrue and slanderous allegations," saying it was pursuing legal action.
Late last year, analysts and blog FT Alphaville also questioned Wirecard's acquisition strategy and financial dealing in emerging markets like India and Asia. Wirecard has grown rapidly by buying a large number of businesses in emerging markets for significant sums. But J Capital Research, a US and Hong Kong registered independent research group, claimed it "found little evidence that Wirecard has any volume of business."
Wirecard strongly refuted J Capital's research at the time and said it "fundamentally misunderstands the Wirecard business model."
von Waldenfels told BI that the Zatarra report was the strategy of some hedge funds, who target companies with aggressive reports and profit from the subsequent share price fall. Zatarra admitted in the research that it was looking to profit from a share price fall by "shorting" the stock (borrowing shares, selling them, then pocketing the difference if the price falls when it needs to buy them back and return them.)
"It hits from time to time different company," von Waldenfels says. "It's the business of some large funds, their key actual strategy. A number of other players have had those short attacks. Actually, we see right now we are better than before. February, March when it happened was kind of a strange situation but we don't suffer from that."
Wirecard held an investor and analyst day in May to reassure on the international strategy that seems to have buoyed the share price.
von Valdenfels says: "Internationalisation is a very big thing. We had some interesting M&A transactions. We entered emerging markets like India, Brazil, and the last one we acquired was a large card portfolio of Citibank in North America. That's one part, to have a global footprint. The other thing is to extend out core business, our technology, in those markets."
As for the UK, why are we seeing so many card-linked apps? von Waldenfels says: "People need more and more easy access to their budgets and there are new platforms like Apple Pay and Samsung Pay. The key success factor is always the ease of use, the ease of setting up, and security."