Is Your Fintech A Fraud?
Five Red Flags From Inside Wirecard
Wirecard has gone down as one of the biggest corporate frauds in history. The German fintech “unicorn” (I hate this word, because Wirecard was actually real, while unicorns are not merely rare, they are mythical) that was once worth nearly $30 billion went bust after a $2 billion hole in its accounts that had been missed by the auditors was finally uncovered.
The CEO is under arrest and the COO (the mysterious Jan Marsalek) is nowhere to be found apart from on Interpol’s “most wanted” list. Pretty scandalous and clearly evidence of systemic failure in regulation and auditing. But the news that Wirecard’s core assets have now been sold to Santander for a hundred million euros (Wirecard staff will transfer to Santander’s Getnet payment technology subsidiary) set me thinking again. In fact the news set me thinking “hey, I know people who worked for Wirecard and they were good people, I hope they are OK”. Then I began to ruminate on the issue of “how was it that they didn’t know what was going on”? Then I started to speculate “if I was in their place, would I have noticed”?
And then, most importantly, I started to wonder what the people I know could share so that we don’t get fooled again.
Don’t imagine that you are so smart that you would not have been fooled by the Wirecard CEO’s shenanigans! Most people you work with aren’t crooks, even in investment banks, so you have will have had little experience of dealing with fraudsters. Therefore when you see bad practice, you tend to ascribe it either to management incompetence in established companies or youthful excess in startups. Most of the time, you’d be right. But some of the time you are ignoring a red flag.
I spoke to a good friend of mine to try to understand just how so many capable and experienced people had been fooled by what their leaders were doing at Wirecard. Laura McCracken had recently been recruited by the board of Wirecard as Global EVP, Financial Institutions, to help the transition from scale up to mature business. Laura has previously held senior positions at Amazon, Facebook, Citi and American Express
Strategy and Stealth
In companies that grow quickly, through acquisition rather than organic growth, it is often the case that the corporate structure is a fossil history of the evolution of the corporate beast. In a good company, the corporate hierarchy and holding structure will be periodically re-organised to reflect the functions, the geographies or the services of the business. Wirecard was organised by entity, and there were far too many of them. A culture of confidentiality meant that there was no transparency across entities or indeed within many of them.
Within this fossilised structure, there was a “need to know” mindset more suited to the production of Patriot missiles than the issuing of payment cards. Personally, I think “need to know” is a huge red flag and it is one of the aspects of the company that Laura and others were surprised by when they first came into the business. As she said to me, executives simply cannot function without an ability to “connect the dots” between business and strategy.
Earnings and Ethics
Everyone from the board to BaFin was focused on the impressive (but as it turned out, mythical) earnings and the CEO’s growth predictions. But ethics can’t always take a back seat to earnings and corporate boards should remember that they have a role in making sure the fundamentals of a business are in place and those fundamentals are not simply numbers. It’s a red flag when a board doesn’t demand integrity in processes and procedures.
Management and Metrics
Wirecard management was wholly focused on outputs and there was no attention to inputs. This was a symptom of a more general problem of a lack of process, ethical or otherwise, that pervaded the organisation. With no internal platforms for ERP or CRM, reporting was based on the exchange of spreadsheets and scribbled notes. With little attention paid to due diligence or deal structure in the sales pipeline, with no measurement or reporting on customer satisfaction and retention, and with no clarity on how the performance of individual units was related to overall corporate strategy even senior and experienced managers were in the dark on business performance. That’s another red flag right there.
People and Positions
Organisational hierarchy should locate roles that are needed to execute the corporate strategy but a number of people have told me that in Wirecard the organisational hierarchy was built around individuals, personal relationships and loyalties. This is never healthy in the long run. First of all it makes it very difficult to attach a balanced scorecard to any of the roles so that performance can be assessed and employees can be supported. Secondly it means that the organisational hierarchy is often suboptimal and not able to support the business in meeting its goals.
Loyalty is of course important, but it is only more important than corporate structure in the Mafia. Well-run companies deal with this problem to a great extent by balancing internal promotion with external hiring so that roles have a mix of new and old blood, crosschecking and different ideas, bringing in a fresh pair of eyes here and there to challenge existing mental models and stop groupthink in its tracks. Wirecard had too many senior management positions filled by long time employees, and that’s a red flag in a business that wants to mature.
Mission and Meaning
There were no corporate goals other than sales targets and those are not a mission statement nor are they values. Insofar as the company did have a high-level strategy it was aspirational rather than actionable and left even senior employees wondering about their purpose and direction. Another friend I spoke to was Karl Mohan, who was Wirecard’s General Manager for Australia and New Zealand. He used the word “gobbledegook” and I think that’s an accurate description of management goals that are not based on realistic corporate strategy. In order to create a long-term, sustainable corporate culture you need to have a strategy but you also need to have values that are clear and understandable to all stakeholders. Laura told me that in Amazon
A lot of this comes down to having the right kind of leadership for organisations in different stages of growth. This is hardly a secret and there are thousands of business books about this. There are many aspects to good leadership and many great leaders we can all learn from. Frankly, I’m no expert on leadership but I do know that a CEO’s manic obsession with share price is not a sign of good leadership but a form of obsessive-compulsive disorder (the same as you often see in people who hold Bitcoin) and a definite red flag.
Won’t Get Fooled Again
What should you take away from this sorry tale of corporate collapse? Well, the fintech you work for probably isn’t a fraud, but you might want to keep these red flags in mind when you next see a management memo that doesn’t make sense, a strategy deck that is nothing more than sales targets or a board report made from spreadsheets of obscure origin. They might be indicators of the kind of run-of-the-mill managerial incompetence that we are all familiar with, but… they might not.