Long before alarm bells sounded at Wirecard AG, the now-insolvent German payments processing company, there were red flags.
The Wall Street Journal reported on Monday (July 27) that Visa and Mastercard each fined Wirecard in excess of $10 million more than a decade ago for suspicious transactions.
And since 2015, Visa and Mastercard executives have been concerned about issues with Wirecard that included miscoded gambling transactions, high numbers of stolen card purchases and reversed transactions which led to substantial fines, sources told the newspaper.
In Visa’s case, it asked Wirecard to stop doing transactions with high-risk businesses such as pornography, gambling and unregulated healthcare products, the sources said.
It appears these companies were lucrative for Wirecard’s bottom line. For example, Pornjapan, a pornography vendor, was charged a 10 percent fee for transactions handled by Wirecard in 2017, according to internal Wirecard documents viewed by WSJ. Typically, merchants pay 2 percent to 3 percent transaction fees for U.S. credit card purchases.
Visa and Wirecard declined to comment, according to the report. Mastercard said it monitors its network for violations of law and noncompliance with its rules.
While the Federal Trade Commission plays a role in identifying card fraud, the industry relies, in part, on self-regulation, especially outside the U.S.
Credit card companies can levy fines to payment processors for too many disputed transactions or disguising the true nature of sales, the WSJ reported.
Scott Talbott, vice president of government affairs at the Electronic Transactions Association, an industry trade group, told the newspaper banks and card processors like Wirecard are expected to detect and reduce fraud.
“Processors can go rogue and engage in fraudulent activity, either through willful blindness or by aiding and abetting fraud,” he said. “The card networks are a strong link in the chain to defend against that.”
As investigators identify the nature of Wirecard’s activities, one focus is on its practice of managing payments for merchants other companies would avoid.
The troubles afflicting Wirecard have impacted lenders in Europe who say they expect to recover as little as 20 percent of the nearly $2 billion they are owed by the company.
The financial technology company faces insolvency with debt of nearly $4 billion, after it was revealed that $2.1 billion went missing from two Philippines banks.
On Monday (July 27), Michael Jaffe, Wirecard’s insolvency administrator, said five dozen potential buyers with backing from more than 130 investors have lined up to purchase what’s left of the company. The bidding is expected to start next month.