Wirecard’s Insolvency Is a Warning to Fintech Investors

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The Wirecard scandal serves as a timely warning for regulators that have eased their rules to nurture startups into the next billion-dollar unicorn. Investors need to be extra vigilant too.

On Thursday, the digital-payments company started bankruptcy procedures due to “impending insolvency and over-indebtedness.” German officials are under fire for failing to investigate—and even pushing back against—accusations that something was fishy in its accounts. Regulators seem to have been more cheerleaders for the former market darling than a watchdog.

There is a broader lesson for investors. Many European financial-technology or “fintech” companies face little official oversight as regulators try to foster innovation and growth in a sector that promises to transform the way consumers spend, bank and save. That puts even more onus on shareholders than usual to know exactly what they own.

Established in 1999, Wirecard was a slow-burning story until late 2016, when its stock price really took off. As questions arose about the company’s business model and growth, German authorities circled their wagons—filing a criminal complaint against the accusers and banning short selling of the stock. That isn’t such a good look now that the concerns raised appear to be valid.

This accounting scandal is a special case, but it also highlights the challenge regulators face in trying to be both a champion and an enforcer. British and European financial watchdogs are trying to do just that.

Starting in 2016, they eased their rules to cut requirements for startups and give them access to big banks’ data. The approach has created a sandbox where fintech companies can test out new ideas and eventually graduate to full compliance as they grow up. It is innovative but not without risk. It also could prove tough to decide when to rein in exciting homegrown unicorns.

Europe is willing to take some chances in its quest to create its own digital world-beaters. The region’s leaders are scarred by letting U.S. and Chinese companies dominate other big tech sectors and desperately want local startups to prosper.

The challenge can be seen in the U.S. as well. Tech giants such as Facebook and Google also benefited hugely from light-touch regulation in their early years. After well over a decade, Washington is still grappling with how to balance the competing needs for oversight and innovation.

Investors always take a risk when buying into a growth company that might be the next big thing. But they need to be doubly diligent when regulators try to play a dual role.

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