When fintechs outpace regulators

Wirecard is a prime example of a company that fell between the regulatory cracks — until it was too late.

The state of play: The story of Wirecard, a fraud-ridden German payments giant, is well known at this point; it's best told by the Financial Times' Dan McCrum, who broke most of it. Along the way, Wirecard used its inflated valuation in Germany to buy legitimate if not particularly profitable card processing businesses in the U.S. and U.K.

• Background: Reloadable prepaid debit cards are becoming increasingly popular as an alternative to bank accounts. But when you sign up for one, it's rarely clear which companies you're actually relying on.

Driving the news: After Wirecard imploded, its U.K. regulator, the Financial Conduct Authority, hurriedly shut down the U.K. subsidiary. The result was that some 1.8 million individuals and 20,000 businesses were locked out of their accounts.

• Those customers didn't even know they had a relationship with Wirecard. They had signed up with other fintechs, bearing names like Curve, Anna, and Pockit.
• The apps used Wirecard to move money in and out of bank accounts at Barclays Bank. That money, it seems, was safe — but it couldn't be accessed while Wirecard U.K. was shut down.
• The FCA unlocked the accounts this week.

Could the same thing happen here? Yes.

• How it works: Wirecard North America is up for sale and isn't responding to requests for comment. But payments expert Richard Crone says that any number of entities might have had the ability to follow the FCA's lead and shut down Wirecard's U.S. operations, including private-sector companies like Visa and Mastercard, as well as partner banks like Fifth Third Bank.
• Wirecard North America's primary regulator was the FTC, says Crone, and the FTC is not really a financial-services regulator. The company would also have been technically regulated by a patchwork of state-level money-transfer licenses.

What they're saying: "When banks were doing all the processing, it was pretty straightforward who the regulators were," says Crone. "The FTC is far less aggressive."

The bottom line: America's banks are generally well regulated; our fintechs generally aren't. Even if they don't hold customer money, their failure could still cause real hardship for millions of Americans.