Wirecard crisis looms large over Europe's fintechs


Wirecard, one of Europe’s highest profile fintechs, is facing a full-blown crisis after admitting that €1.9bn of cash that it thought was in one of its businesses probably does not exist.

At one point, Wirecard was worth more than Deutsche Bank and was seen as a trailblazer for the European fintech scene. The Munich-based company is a payments processor with over 5,000 employees and offices around the world. It had attracted a loyal investor following.

But it has had a tumultuous seven days. Last week chief executive Markus Braun resigned after Wirecard said that it could not release its annual results because €1.9bn was missing.

On Monday the company admitted that the money probably does not exist and withdrew its results for last year and the first quarter of this year. “Potential effects on the annual financial accounts of previous years cannot be excluded,” it added.

Wirecard is now in talks with its lenders about its credit lines, and says it is looking at cost cuts and disposals “to ensure continuation of its business operations.”

The shares, which were trading at €98 a week ago, have lost 85 per cent of their value and now trade as €14 each as of Monday afternoon.

For the full story on the company’s woes, from the concerns over its accounting reported by the FT’s Dan McCrum to the tumultuous events of the past week, visit the Financial Times’s Wirecard homepage.

The growing scandal is likely to have repercussions well beyond Wirecard. Investors around the world, including high profile fund management houses like DWS and Jupiter, poured millions into Wirecard shares.

And questions are being asked about why regulators did not take concerns about the company more seriously.

Felix Hufeld, the president of German financial watchdog BaFin, said on Monday the Wirecard scandal was “a complete disaster” and “a shame” for Germany.

European fintechs will be hoping that it does not evolve into a “complete disaster” for their industry as a whole, just as it is trying to emerge from the biggest crisis it has ever faced. 

Line chart of Market capitalisation (€bn) showing The rise and fall of Wirecard

Investors face Lemonade dilemma
Lemonade has always had the ability to generate the sort of buzz that other insurtechs can only dream of. Its knack for putting itself in the limelight — so much so that the five-year-old fintech now outranks the 3,000-year-old drink on Google search — is viewed by rivals with a mixture of envy and scorn.

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Rivals were out in full force earlier this month when the New York-based insurer announced its plans to float. The IPO filings from the company, which sells insurance to home renters, were quickly scrutinised by bankers, bloggers and rivals for details of how the business model works.

“Their ability to fascinate insurers and analysts has been incredible,” says Matteo Carbone, founder of the IoT Insurance Observatory, a think-tank. “Their storytelling has been incredible.”

The company was reportedly valued at $2bn in a funding round last year, but capturing the imagination of stock market investors is likely to be a very different challenge. Traditional insurers, with their low growth and high dividends, are treated by the stock market as the polar opposite of tech companies.

Lemonade embodies both. Or, as Mr Carbone puts it: “Lemonade is an insurance company that has been built using technology . . . But it is an insurance company. Its job is to collect premiums and pay claims.”

The success — or otherwise — of its IPO will depend on whether investors buy Lemonade’s argument that it is more tech than insurance.

Lemonade’s arguments are reinforced by the fact its business model is very different from that of ordinary insurers. It earns revenues by taking a fee on every policy it arranges. That way, it says, it has no incentive to deny claims. Money left over that is not used for claims is given to charity.

Still, the IPO filings show that it faces many of the same pressures as other home insurers, such as the need to spend a lot on marketing and the need to get pricing right to prevent underwriting losses.

Lemonade has struggled with losses in the past. The IPO filing shows its loss ratio — payouts as a proportion of premiums — was 79 per cent in 2019. That is a big improvement on the 161 per cent ratio two years earlier but not enough to make the company as a whole profitable.

According to Mr Carbone, improving the loss ratio has caused pain elsewhere. “It looks like they have done it by raising prices,” he says, adding that higher prices could have hit growth. Policy numbers rose by 43 per cent in the second quarter of 2018, but by the first quarter of this year that growth rate had slipped to 13 per cent.

Line chart of Growth in Lemonade's quarterly customer numbers showing Less fizzy

So if Lemonade is subject to the same commercial pressures as other insurance companies, does its technology set it apart?

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Lemonade’s prospectus claims “a state of the art platform that spans marketing to underwriting, customer care to claims processing, finance to regulation.”

It adds: “Our architecture melds artificial intelligence with the human kind and learns from the prodigious data it generates.”

Some outsiders have been impressed. One investor in insurtech companies, who does not hold Lemondae, said: “It is fast, and it takes good technology to deliver underwriting decisions and pricing quickly. Some of the stuff on claims is more opaque, but still impressive.”

Turning that technological advantage into commercial success is still a work in progress. The company was lossmaking to the tune of $109m last year, more than double the loss the year before.

And Mr Carbone believes that Lemonade has struggled to match its original promise. “The company has grown significantly, but it is still a small [insurance] carrier,” he said.

Lemonade generated $116m of premiums last year, well up on 2018’s $47m. The US renters’ insurance market as a whole was worth $5.3bn in 2018, according to research firm CB Insights. The wider US homeowners insurance market was worth $74bn.

“The line of business they are in is very difficult,” says the insurtech investor. “The question investors have to ask is whether you can build a brand new company which focuses on a single line of business and can compete with established companies. It is possible, but it is really difficult to do.”

Quick Fire Q&A

Company name: Nucoro

When founded: 2018

Where based: London

CEO: Lennart Asshoff

What do you sell, and who do you sell it to: Technology that enables banks and other financial institutions to build digital savings and investment propositions for their clients.

How did you get started: We realised firms needed a new technological foundation enabling them to build better digital saving and investment solutions.

Amount of money raised so far: €16.5m

Valuation at latest fundraising: N/A

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Major shareholders: Benjamin & Ariane de Rothschild

There are lots of fintechs out there — what makes you so special: We’re building the innovation platform for savings and investments for years to come, empowering firms to offer better services.

Further fintech fascination

Follow the money: Renaud Laplanche has his second unicorn, writes Robert Armstrong. Upgrade, the online lender he founded after a governance scandal drove him out of Lending Club, has a paper valuation of $1bn after last week’s $40m investment from Santander’s venture capital arm. The company, which issues credit cards and makes personal loans, says it has loaned $3bn to 10m customers since its 2017 launch. Mr Laplanche tells fintechFT that his experience at Lending Club in the financial crisis is helping him manage Upgrade during Covid-19. Upgrade tightened its underwriting standards in early March, but has continued to originate new loans. Two factors have helped: a relatively affluent customer base, and loan funding that comes from banks, rather than the capital markets.

Trendwatch: The asset-backed security market has been more or less closed to online consumer lenders since Covid-19 hit, writes Robert Armstrong. But that changed last week, when Pagaya, the New York and Tel Aviv-headquartered tech-driven asset manager, announced it had closed a $200m consumer ABS. Pagaya chief executive Gal Krubiner tells fintechFT that there are great opportunities for those with the technical savvy to pick individual loans carefully — as Pagaya does using artificial intelligence. “This is the most data-rich recession in history, so you have the opportunities if you have the technology to distinguish risks,” he says.

Follow the money (2): Checkout.com, a digital payments processor, has become one of the UK’s most valuable privately held tech companies after raising money at a $5.5bn valuation, reports the Financial Times. The company raised $150m in the funding round, and may now consider a listing in the US although it did not set any timeline for a possible IPO.

AOB: Facebook has launched a WhatsApp-based digital payments service in Brazil, reports the Financial Times; UK based challenger bank Monzo has completed a £60m fundraising, but the valuation was 40 per cent lower than at its previous funding round, according to Sifted; US fintech Credit Sesame has bought Stack, a Canadian challenger bank, says Finextra.



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