Before its dramatic fall from grace last week, Wirecard AG counted on a small banking unit just outside of Munich to help drive stellar growth in its main payments business.Now Wirecard Bank AG, which attracts deposits by offering customers market-leading interest rates, is at the center of attention as clients ask if they’ll get their money back, regulators watch warily for fallout in the financial system and investors worry whether the parent company has any kind of future.
The unit has a full German banking license, meaning it can accept deposits and grant loans as well as facilitate the electronic payments that Wirecard is better known for. But it’s at the heart of the company because of its relationship with credit card companies Visa Inc., Mastercard Inc. and JCB International, which are key to the firm as a whole staying in business.
To fuel its growth, Wirecard has been paying depositors attractive interest at a time when traditional banks increasingly started to pass on negative rates. This year, it began offering a 0.75% interest rate via its Boon app, betting that more deposits will translate into more payments via its systems and lucrative contracts with stores and online merchants.
Wirecard’s customer deposits from its banking operations swelled to 1.72 billion euros ($1.94 billion) at the end of September from 1.26 billion euros at the end of 2018. That’s split mainly between Wirecard Bank, Wirecard Card Solutions Ltd. and Wirecard North America, Chief Financial Officer Alexander von Knoop said on a call with analysts in November.
The good news for customers of Wirecard Bank is that their money is protected because the unit is part of a group of German lenders who have pledged to insure one another’s depositors should a bank run into trouble. Each depositor has up to 19.7 million euros of funds which are eligible for that guarantee, according to a spokesman for the Association of German Banks. The depositor’s nationality doesn’t matter.
In addition, German watchdog BaFin is working to shield funds at the division from being used elsewhere in the company, according to a person familiar with the matter, who asked not to be named because the information is private. Reuters reported the move earlier.
BaFin started to scrutinize the banking unit earlier this year, though the recent developments have raised questions about its handling of the scandal. Singapore’s regulator has told Wirecard to keep customer funds from its payments processing business in the city state at local banks.
Wirecard Bank generates most of its revenues with the group through the sales structures of sister companies, including financial services for companies via card acceptance contracts, business accounts and foreign currency accounts, according to the 2018 annual report. By working together with fintech companies, it produced additional revenue from payment services.
Some clients are already moving to the exit. Mobile bank Revolut Ltd. decided to migrate its customers away from Wirecard to alternative payment providers to avoid any service disruption, according to a person familiar with the matter.