Wirecard: Crash at record speed
There was certainly no lack of drama on the German equity market in the first half of the 2020 stock market year, with the coronavirus pandemic causing long unseen ups and downs on the DAX as well on the other international benchmarks. As if that were not enough, a major accounting scandal shook Germany's reputation as a financial centre shortly before the middle of the year. After payment processor Wirecard admitted on 18 June that it could not find some EURbn 1.9 of money held in trust, roughly a quarter of the group's balance sheet total, events quickly spiralled: CEO Markus Braun resigned and was later even arrested for a while on suspicion of false accounting and market manipulation. Wirecard is now insolvent. Within one week the company, which had been a member of the DAX since September 2018 and had long been exposed to the accusation of manipulation, had seen its stock market value plummet, as Wirecard collapsed by 97%.
Beating heart of the fintech movement
The scandal casts a long shadow over the German financial supervisory authority, the BaFin, and EY, the company's auditor. Meanwhile, the competitors of the fallen company have not so far suffered guilt by association. On the contrary, the shares of other payment processes continued to soar at the end of June. Now they could even pull in additional business if customers turn their backs on Wirecard. The Bavarians handle the payment flows of leading companies such as the airline KLM, furniture giant Ikea and retailer Aldi-Süd. Either way, digital payments are seen as a growth market. Whether in online shopping or via the smartphone at the point of sale (POS) in stores, across the world more and more consumers are paying for their purchases electronically. According to Statista, global transaction volumes totalled just under USDtn 3.9 last year. "The digital payments segment is by far the largest subsector of the entire fintech market," according to Statista analyst Sofia Zavialova.
Intact growth opportunities
The market research portal expects to see digital payments growing by an average 16.5% a year until 2024. If the experts are right, the volume would then stand at over USDtn 8 (see graph). In 2019 the digital commerce subsector accounted for more than 70% of the money processed. Statista includes the purchase of goods and services on the internet, payments for digital media – think streaming – and online travel bookings in this total. Mobile POS payments still lag some considerable way behind in this market. Nevertheless, the analyst reckons that smartphone payments will enjoy disproportionate growth – volumes could almost quadruple by 2024 compared with 2019. On a regional comparison, China is setting the tone: in 2019 the Middle Kingdom was responsible for more than 40% of the digital payments volume (see graph). Although Statista actually predicts somewhat stronger growth for the "old continent", there will be little change in the pecking order.
Upheaval accelerated by lockdown
The prospects for the payment market, according to Sofia Zavialova, depend significantly on the degree to which the innovative systems can replace cash as a means of payment. In her view, the critical factors will be how consumers behave and what advantages they see in the digital wallets. The coronavirus pandemic could have accelerated the change of thinking. During the lockdown, internet trading experienced a sort of economic stimulus. At the same time, for hygiene reasons bricks-and-mortar retailers were requiring their customers to pay contactlessly by credit or debit card or using a smartphone app. According to Zavialova, payment processors need to continue to enhance their services and also persuade less technologically-minded consumers of the benefits. Despite the Wirecard debacle, investor confidence in the sector remains high. In view of the sometimes ambitious valuations, however, bargains will be hard to find – although following the powerful reboot of the last few months this will be a challenge for equity investment in general.