The MoneyPot LIVE: Fintech Under Scrutiny: The Wirecard Saga with Pav Gill and Jason Mikula

This is Essential Audio. Okay, welcome to the Money Pot. I'm Rachel Morrissey. I'm one of the co-hosts of the Money Pot here at Money 2020. We are here live at the Money 2020 conference in Amsterdam. I've got my host here, Mickey Tisfaya. How are you doing, Mickey? I am fantastic, Rachel. We are back in Amsterdam once again. We are. This is, and the show looks really cool.

The show looks cool. I can't wait for you guys to see the show. I've been super excited that we even have Money Pot branded mics. I know. I'm like, wow. We're going to have to put pictures of this everywhere. Yeah, yeah, for sure. So, we have two amazing, amazing guests. We're going to have a really fun conversation here today because we've got Popgill here, who is the whistleblower for the Wirecard. What do we call that? Fiasco scandal? Story. Let's do the... Story? Are we trying to be nice, Stuart?

I'm trying to be like... The Wirecard story. And we have Jason Mekula, who is here because he's been doing some amazing coverage of what's going on with Synapse. And, if I'll have a lot of the other things that are happening and how that's all intertwined. And so, we're going to be talking today a lot about the nature of what's going on and whistleblower culture, how we think about some of these things and how they're going to affect the industry, the nature of how this makes us look at what's going on, particularly in making it as a service industry.

And so, I'm going to turn it to Miki first because he's going to be driving this discussion. Thank you, Rachel. Yeah, I mean, I think, you know, when you and I were speaking, I think part of the thing that was super exciting about having Pav and Jason on is, to a degree, there is a part of a story there around what's going on in FinTech, how much folks are working to make sure the industry is transparent. And I guess it will be, I thought, let's have a conversation about to see how much progress we've made, how much are these two things, these two stories that happened,

what five, six years apart, are they part of a spectrum or are they different things, right? So, I guess maybe a good starting point to anchor us in the conversation is to turn to Pav. Thanks for coming all the way from Singapore to join us as well. And maybe I just want to ask you, I guess, to start off with, when did you kind of first realize things were amiss when you joined Wirecard and how long did that take? Yeah, that didn't take very long. Yeah. I mean, if you looked at any of their subsidiaries, financials,

they were all loss making. So, no one understood where the money was coming from. I mean, the sales team was definitely very happy because somehow, you know, numbers were up and they weren't really selling much. Yeah. So, yeah, just from an objective reading of financials, 95% of the company was in the red. And it was just like instantly you were like, as soon as you kind of, because you went in as part of the legal team and I guess you're kind of looking at all of the paperwork and maybe even accounting data and then it was just very visible to you immediately

and did you have to start thinking about how to act very immediately too? Yeah, it was strange because I was told to get to know the guy that was running finances, his name was Edo. It's an Indonesian chap with a dubious background, CV-wise. That's always a good sign, dubious background, CV-wise. You're always looking for that when you're coming to a payments company. One of his first few introductions to me was that he's married to a drug dealing family in Jakarta, which has the red flag as a kid for a thing.

Ding, ding, ding, ding. NFI, so. I mean, he was super flexible with numbers to put it mildly. I don't know if that's what you want from your accountant, right? That kind of flexibility. Super flexible. Until you get to your tax account. No kidding. That is hilarious. I love that. That's a nice, yeah. Okay, it sounds like you have very instant. Well, and the other thing about the wire card thing is the more people dug into it, the more kind of absurd it became that people didn't realize this faster.

I mean, I think back on previous scandals that sort of resembled it, I mean, I know it was compared to Enron a ton and it had a lot of echoes of that, kind of a group of people that had some dubious backgrounds and you're like, how did these people convince anyone? This was a good idea. And then the stuff on wire card that broke about possibly a Russian spy and you're just sitting there going, this could not get any more.

I mean, this is made for a movie. I can't wait until the movie comes out. I mean, Netflix were licking their lips when they saw the story breaking live, I think. And I remember like, I was an analyst at Business Insider and I remember reading the story on the FT being like, this is the most surreal story to read on the FT because it's like a spy novel. I'm like, you know, John. And so before I go to then, I'm going to go to Jason with a question. I've set you up with it. I know it might not be like that, but I mean, you've been in the news yourself lately,

which I think is probably interesting as a journalist as well. You've been a big part of what's going on and uncovering those stories. Are you seeing any similarity with what's going on in the banking as a service industry where there is fraudulent practices or is it more to do with just an industry that's growing and there are missteps that occur naturally? Yeah, I mean, I think in any industry, you're going to have a spectrum of sort of how ethical or how morally and legally some of the players act, right?

So they're talking about tech broadly. We have plenty of examples. Theranos, which was an outright fraud. Real estate, I'm thinking specifically of WeWork, which was not a fraud per se, but was kind of a ridiculous situation, which I watched all of the Hulu and Netflix and whatever Apple TV. You watched all of the documentaries? I think there was like two or three different ones and my partner and I excitedly watched all of them. Yes. And so I think there's no difference in banking as a service,

right, or the banks that partner with those middleware providers and fintech companies. I think you do want to be careful about painting with too broad of a brush and saying, there's a risk of saying, oh, this entire model doesn't work. Everyone is a bad actor. We should just clamp down on this. I think that would be a mistake from like a public policy standpoint because there are benefits both to the banks that work in the sector as far as having a viable business model as things move away from geographic banking

to more digital, as well as to consumers who use these products, right? If you look at a lot of what fintech in the US is, it is very geared towards consumers who have not been well served by establishment banks. So think of Chime and Vero and some of these sort of earned wage access or cash advance kind of things. If you sort of clamp down on everybody, there are consequences to that. So to try to specifically answer your question, I think in the Synapse case,

there's a lot of unanswered questions about sort of what happened here. Yeah, we're in the middle of that one. Yeah, we are in the middle. I've been very careful in how I write about it to try to highlight what a lawyer says in a court filing or what a lawyer says in court is a representation. It is not a fact, right? And so we have Evolve saying one thing, Synapse saying something else, and even as well-informed outsiders, I don't know what's true. Yeah, well, and you can't,

the other thing that's interesting here to me is, okay, so we have Wirecard, we're talking about some stuff that's going on right now that we're in the middle of uncovering. We're not actually sure about whose story is actually pitching out, and it could be somewhere in the middle, right? In all probability. And then we've had other scandals that have happened. And I'm kind of curious because I sort of think, I wonder a little bit about the exception, proving the rule basically.

I mean, we could paint the whole industry with a broad brush, but maybe the fact that we did, we were able to fish out a possible problem or a possible bad actor. It may not be an indication of the business model itself, which is that there's a bad, there are going to be bad actors in every single sector. There are going to be people that take advantage of these notions of innovation to kind of capitalize for themselves right away. And I mean, the Wirecard one sort of proves

that the payments industry has got tons of actors, you know, in the name of lots of people that are very good and very well-regulated and their books are clean. And it's not an either or, right? So it sort of was an exception to prove the rule because it made the news. Yeah, I mean, that's true. And a lot of times you can put as much regulation as you want, it doesn't work because at the end of the day you still rely on people to adhere to those regulations, right?

And at the same time, you also rely on people to tell somebody that someone else is not following those regulations. So I think that's where the balance lies and that's where I think companies need to also think about things because just because something bad is happening, it's not gonna mysteriously disappear on its own. Someone also needs to confront that and deal with it in a sensible way. And that actually, so when you guys are looking at these stories, right? I mean, you're from the journalist perspective,

you were inside and going, I've got to get this story out. I've got to figure out who to tell. How did you figure out who you were going to tell? I mean, I did and my mom did. Mom for the win always. That's where the difference is. And I think also I was forced into a whistleblowing case because when I was in the company as the head of legal for the Asia Pacific region, I was actually instructed to investigate an internal whistleblower that came to me.

So that's what I was doing. I was actually doing my job. It's just that when the board found out, they were very upset and we know why. Well, yeah, because it was about to explode. So you were actually hired to find out who is a potential whistleblower by wire card. I was already in the position of being a legal person in APEC. Yeah, you were ahead of me. And someone came to me from the finance team fearing for her life. And so I was supposed to investigate it and protect that person's identity. So eventually the board found out, they tried to shut it down. They did all kinds of stuff over three, four months to try to damage me.

And eventually they even tried to kill me by sending me on a attempting to send me on a one-way ticket to Indonesia, which I didn't go for. So that's when the company finally after four months had a legitimate reason to say, okay, you did not follow instructions so we can finally fire him, which is great. So I said, okay, wire card, you enjoy your fraudulent ways. I go find another job, but they didn't stop. They were still sending people to follow me and my mom and all that stuff. So that's when my mom got really upset because she's a single parent and I'm the only child.

And that's when she decided from the sofa not the living room to reach out to journalists. And one day she just told me, hey, by the way, we're meeting the Financial Times this weekend. And I was like, what are you doing? Wow, mom for the win. It's my favorite story ever. It makes me want to go scrub my address off anything on the internet ever. This is a warning for you, Jayce. I mean, this story, I have to say, I'm sorry, but this is truly a story like stranger than fiction because, again, I remember reading it

and you're thinking, FinTech is not, FinTech is FinTech is FinTech. I mean, how dark can it be? And then I'm just like, where is this going to stop? I'm just like, where is it going to stop? Yeah, very dark. I think that this illustrates sort of the most extreme end of the spectrum of intentional fraudulent behavior. Absolutely. But there's also a whole lot of gray area of like, I learned this working in the lending side and the banking side, what sometimes feels like black and white from a legal or compliance perspective.

When you're actually working in those rules, you realize most of it is actually a gray area where it's like, well, your advice from counsel is X, but if you're comfortable taking that risk, you can do it. And it makes you wonder sort of how many of these situations is it intentional wrongdoing versus incompetence versus an overly aggressive business posture? I mean, something Paph mentioned that I think is very relevant to the entire startup space

is board governance. I mean, so much, and I think the VC attitude has shifted a bit. But for a long time, the emphasis, particularly when VCs were competing for investments, was to see how founder-friendly can you be. And if the founding team, the CEO, has control of that board, there's not a ton, even if VCs have a board seat, they might have visibility, but they may not be empowered to actually do much of anything. And so there's a legitimate governance question

here as well. And I think that piece is super interesting because it does turn around, right? The idea of a board is to be the governing institution for a company. But I think the VC model has kind of turned it around, where, as you said, founders are now, because VCs, because they want to kind of secure the founder, where there's a lot of competition, it's actually all about how can we get that seat, how can we have control. And that's really reflective of where we have been as an industry, right?

For a couple of years, their VC money was flowing, there was a lot of competition actually amongst VCs to get certain founders, right? So as money has tightened, and now there's more competition for the money, there's a lot more of a flip of the founders having to compete for the VC money. That kind of changes the nature of that too, and what you can do for that board of governance, and how much influence or control you can assert right from the beginning, I think one of the things that you mentioned there is, you can do certain things

if you're willing to take on the risk, right? So, and in an industry that encourages innovation, that encourages this idea, risk taking is sort of part of the formula. People will tell you, you can't be a successful entrepreneur if you're not willing to take risks. And that's where the area gets super great because you're taking risks in certain areas. So when your legal team or your board of governance comes in and says, you can't take those kinds of risks or you shouldn't take those kinds of risks,

but your whole drive and you've been rewarded basically for being somebody who takes risks, you're less likely to take that to heart, I think. Well, in something I would point out again, particularly about sort of venture-back startups is almost universally, these are not profitable companies. And so the time horizon and the risk tolerance is gonna be very, can be very different than a mature, large private company or public company.

Because if you're operating in the sort of traditional, 18 month VC fundraising cycle, and you know, like, oh, I have to hit certain targets so I can put it in this pitch deck and go back to investors and raise more money, otherwise it's all over. You have a lot of pressure and a lot of incentive to all your stakeholders, your employees, your existing investors, which might include friends and family who invested early on. So there's all sorts of pressure and all sorts of incentives to make sure

that you're able to show those KPIs and go raise more money because otherwise the party's over. And it's to try to be a little empathetic. It's understandable how that might engender some questionable behavior. Especially because I think, as you mentioned, a lot of it is pre-profit. You're not making a huge amount, it is predictive, right? So a lot of it is up for debate, really, and truly. And I think that's the challenge. I guess one of the things that I'm thinking about with Wirecard, again, to your point, Paviz,

or what we were discussing earlier on, how much of the Wirecard situation do you think is also a result of the broader way in which Fintech and even in Europe and Germany, Wirecard was a real success story. It was built up, I think, a lot of it, and there's my opinion to you, right? A lot of it was kind of made it bigger than it would have been because I think at some point it was as big as Deutsche. Bigger. It had a bigger valuation than Deutsche, right? Deutsche Bank. Bigger valuation, and it was, I think, so I wonder, as part of it,

do you think part of that was to do with just this desire for Germany as well as a country to look like, hey, we're also a big Fintech player. There's this kind of desire to get payments as an industry to be a big player. There's also, there was a weird desire to have companies really competing with banks and established players without always necessarily thinking about the underlying piece. Do they have one of the things in place? How much do you kind of think about it? Yeah, I mean, for sure.

Wirecard was like the PayPal of Germany, right? And 24 billion market cap is not a small amount. So I think there was a lot of pressure to not want to look to some extent. And the argument is strong. I mean, if you're a company, you're doing all these fraudulent things, you're telling investors, why are you whining? I'm making you money. Telling everyone else, like, do you want to listen to random people saying they're doing bad stuff or do you want to look at the big four

that's just signed off on our audit, right? So who do you want to listen to? And we've been growing for 20 years. We are listed. We've got due diligence requirements on us. So how could everyone in the industry be wrong except for a few people that are saying they're doing bad things? And I think going back to the earlier point as well, from an executive standpoint, like a CEO standpoint, there is a very strong tendency to not want to hear bad news, especially if you're in a very successful company. So you could be the CEO that tells everyone,

I don't want to hear bad news. I don't care how you do it. Just give me the numbers and hit the targets, right? So that kind of instruction and mentality might be taken the wrong way. That look, we don't want to disappoint the boss. We don't want to disappoint our superiors. We've got KPIs. We've got OKRs to meet. Let's just do it. I mean, I think it's really easy to ignore red flags when everyone is busy counting their money, right? And I mean, you're out of industry

and I'm not saying that this company is fraudulent, but I think Tesla is the perfect example of it, right? Where it's like, well, look at the market cap. And Elon Musk says, well, if I'm doing drugs, I should keep doing it because all the numbers are going up. And it's just like a complete, you know, abject, I don't know if that's like the lesson to take away from this. That's a situation I don't want you to know. Drugs are good. But just a complete and abject failure of board governance because everyone is too busy counting their own money. That's such a good point, too.

I think you can't be doing due diligence only when things are bad, right? Like due diligence needs to be consistent across the board. I think that's a really good point. I guess the story that I think, for me, in my mind kind of helps bridge all of these things is the SBF story, right? Where FTX, and part of it is because there's a part of the narrative, right? If you kind of take some of that face value where it wasn't necessarily fraudulent from the beginning, but it was like a slippery slope.

And how much of the wire card story? I know you started, Pabby told us there was red flags from the beginning, I know, but I wonder how much of that was, you know, partly not necessarily big planned out fraud, right? But a slippery slope. And how much of women, you know, we talk about SVB or even some of the stuff that's happening in banking as a service where you don't necessarily always need to be doing intention fraudulent activity, right? Sometimes just by mistakes and then by not looking, by not wanting the bad news, by looking away,

and then you kind of start fostering that culture. How much of it are we seeing? Or you're fostering a culture of overly creative solution. Yeah. Flexible. Flexible accounting. I mean, I think that people are like, if I can delay the bad news, right? If I can find a way to fix it before it's a real issue, and then they get caught in the middle of fixing it, right? And I think that there's a certain amount of that going on. So it doesn't have to always be nefarious. I think wire card seems pretty nefarious.

The wire card one, yes. The others, I think you're right, yeah. I mean, from a FinTech standpoint and also crypto, the issue with these industries is that regulation is always playing catch up. You can't keep up with the tech, right? Even banking as a service is one of those same things as well. So when that happens and a FinTech is getting a lot of VC money, it's showing profitable numbers or good numbers. There's a lot of tendency to use these same argument which wire card also used for 20 years,

which is we are victim of our own success. Can you please give us time? These regulations are coming up here and there. We know we need to invest in corporate governance, in legal compliance and risk, but just bear with us. We are a victim of our own growth. So I think a lot of companies like including FTX, for example, they were playing that same card, right? So it's really cops and robbers in that way.

I think a common thread in a lot of these stories is the tendency to say, no, no, this company is different because it's doing something special and innovative. That was definitely part of the FTX story, right? Sort of presenting like, no, you don't understand why this company is so special and so profitable. It's new, it's complex, it's innovative. You just don't get it. I feel like there was like a kind of similar sentiment around wire card versus some of the more legacy players in the payment processing space.

And we also see that in banking as a service maybe to a lesser extent. It's like, no, no, no, like you just don't understand the business model. That's why you're so skeptical. And I mean, I think that should probably be a red flag. You can't understand the business. You just don't understand it. Maybe that is a flawed business model. I mean, it should be explainable. I guess, yeah, I've lost my headphones because of how excited I was. This is a great, great conversation. But let me both ask you, Jason and Pap,

because one thing I keep on thinking about is as an industry, how much are we responsible in terms of the language we use and the way we think about things like regulation, right? Like, then tech broadly, the idea of break things move fast. And in some areas of tech, of course, we've seen where there's results as a result of that, you know, for lack of a better word. But I wonder, within financial services, given the impact of it, given how much it could transform people's lives.

When you've got money locked up in FTXY, I've got all of these things. People could lose their lives even, right? How much should the industry as a whole be responsible in the way we think about the language and the way we even talk about regulation? Because regulators are a lot of the time, you know, maybe they're, I feel a little bit bad for them. We're like, how the hell is, you know, part of it? Should we be kind of like, hey, we might need to... I mean, I don't think it's a coincidence particularly in the U.S. market, a lot of what you've seen in fintech

exists outside of the banking regulatory perimeter, right? And, you know, on the one hand, I understand that in the sense that it is arguably easier to innovate outside of a bank than inside of it for a lot of reasons. Or any company. Sometimes it's just easier to go outside and just innovate. That's just true of companies. But on the flip side, that also means there is a specific lack of supervision. So, I mean, using the Synapse case as an example

and to illustrate some of the end impacts of that, right? Users of these products that were built on Synapse companies like Yada, which is kind of a Neobank, Juno, which was kind of like crypto plus a Neobank, you know, they saw websites and apps for pages that said, FDIC insured, your funds are held at evolved bank entrust. And one of the things the, I mean, I think the Western banking regulators, including the UK and Netherlands, but also the U.S. have been very successful in doing

is as a consumer, you don't have to worry about where you put your money. You could put it at JPMorgan Chase, or you could put it at local Rando credit union. Anything that's got that logo, that label on it. And you don't have to think about, is my money gonna be there when I need it to pay for this wedding, to pay for university, whatever. That is a big success. That is not true in every country. However, the flip side of that is, I would argue that fintechs, again, particularly in the U.S. context, have unfairly benefited from that trust.

And so somebody thinks, well, if I leave my money in Cash App or Venmo, or if I use Yada, it says FDIC insured, so I'm fine, it's safe. And what we've learned is that is not the case. And for those end users who don't understand, what is deposit insurance? What does it protect me against? Like they're understandably frustrated and angry and want answers because they think, the government, the FDIC is here to protect me. And again, in this specific case, the Federal Reserve Board, which regulates Evolve,

gave a statement that was basically, this is not our problem. Like you said, that is a success story, right? People misusing that. It's hard to always govern. Like it's hard to always check on how people are misusing it because we get very creative with our language and we say things that are a half true. As a recovering marketer, I've been on the other side of it. What is the furthest I can push this without legal implications? Exactly, without legal implications.

We do it, I mean. Without giving a pub like, oh, stop. Before pub goes, the line is fine. This is the line. No, the irony is that I'm a lawyer. So I could be coming up with these. Yeah, he's like, this is how you do it. Exactly, so you come up with the exception phrases that allow for you to do this kind of thing. And I think this is where the industry itself has probably got to worry because as you're saying, FinTech has benefited from this,

whether they actually have that guarantee or not. And things like Synapse, things like Wirecard, these are not necessarily indicative of how the industry as a whole runs. But it does give people a picture or allows people to paint with a broad brush, as we were talking earlier, about the industry as a whole. And so what do you think the industry, is there anything that the industry should be doing

that sort of pushes back on that and says, no, we should have some practices or we should have some things that are accepted that allow for us to be more careful here? Yeah, I mean, I spent three years in the crypto space before I found it confide. And I saw the exact industry issue there. So everybody was pro-crypto at some point. They're like, let's move away from banks, let's get rid of the middleman, let's just go into crypto, right? And then we saw how crypto played everybody out

for one and a half years. And including the industry, including consumers. And the effect of that was ironic because it went the other way. People started saying, okay, maybe we just can't trust these companies, let's go back to banking, right? Let's go back to putting money into deposit accounts or under our mattress or something. I mean, there's a legitimacy that comes with it. Yeah, I mean, I would think to try to also include the European context since we're sitting here in Amsterdam,

having thought a lot about sort of how things work in the US versus how things work in the UK and Europe, I do think one of the big differences and improvements is these alternative kinds of licenses, right? So e-money institution, payments institution. So if you're a bass operator, I'm gonna be in this podcast with tomorrow talking to SWAN. SWAN has an e-money license. So it is a directly regulated supervised entity on its own and then it supports embedded finance

for its customers. In the US context, the regulators, specifically acting Comptroller Sue has been very clear that there is gonna be no fintech charter forthcoming. They're not gonna bend the rules to try to entice fintechs inside the regulatory perimeter. And so a lot of these companies synapse with an asterisk because they owned a broker dealer, which is weird. But for the most part, these fintech companies middleware exist outside of that regulatory perimeter.

They don't have anyone directly supervising them. And that does create these kind of gaps. Now, what are possible solutions? Is there something, and I've been talking about this with Simon Taylor, who I think is running around here somewhere, is there an opportunity for something like a FINRA, like a self-regulatory organization? I think there's possibilities. None of them are simple, surely. No, nothing. Well, this has been an amazing discussion and we have run out of time. So, which is always the least favorite words

of any podcast. But I wanted to thank you guys so much, Jason and Pat, for being here with us today. This has been amazing. I'm sure we'll keep talking in other instances about all of this and what's going on. This is gonna be an ongoing story with synapse for a while. So I don't think that's gonna stop anytime soon. We'll probably be talking about it in October for the next 2020. Probably. And you might need to start using Confide for some of your whistleblowers. Yeah, I might.

I'm not like a synapse. I'm also gonna have to check out Pat's startup. Okay, so thanks to all of our listeners. You can find us on the Many 2020 website and you can find us wherever you listen to podcasts. We love our FinTech nerds.