In Wirecard's collapse, Railsbank finds tech and talent to compete with Apple Card

Within the payments industry, Wirecard as a brand has become almost like Enron — but an exec at Railsbank says the German processor's fall from grace masks talent and innovation that can thrive elsewhere and help forge new paths to financial services.

"Wirecard had its issues, but there were many caught in the crossfire that had nothing to do with the scandal," said Dov Marmor, COO of North America for London-based Railsbank, which hopes assets from Wirecard will help an embedded financial service product Railsbank plans for early next year. "We were in a position to have the infrastructure to support those companies."

This fall, Railsbank agreed to acquire Wirecard's U.K. unit for an undisclosed sum. It's part of what amounts to a scandal sale as Wirecard sheds parts of its business. A subsidiary of PagSeguro Digital has agreed to buy Wirecard's Brazilian unit, while Syncapay came to terms to acquire Wirecard North America. Wirecard this week sold some of its merchant account technology to Santander. Jaffe Rechtsanwälte, Wirecard's insolvency administrator, announced the Santander sale means the "investor process" for Wirecard's core technology assets is complete.

Wirecard's North American unit operated separately from the German Wirecard, and housed a prepaid card business acquired from Citigroup.

The sales of these units followed an accounting scandal that resulted in the arrest of former CEO Markus Braun, and scrutiny of the lack of German regulatory oversight. Wirecard also filed for insolvency, and there were writedowns at banks with exposure to Wirecard.

"Wirecard had a large tech base, so we got to acquire its tech and the team members that will allow us to scale and bring in talent," Marmor said.

Railsbank supports connections between banks and third parties, allowing fintechs, challenger banks or traditional banks to offer financial services and technology. Railsbank is working on a credit card-as-a-service platform, or a way to embed finance in a range of other business services, that will launch in the U.S. in January, followed by launches in other markets.

Railsbank, which is based in the U.K. and has an office in Los Angeles, uses a third-party license in places like the U.S. or Singapore, or its own license in Singapore or the U.K., to perform a credit card-based service similar service to Stripe.

Apple Card is a target use case for Railsbank's project. Apple worked in partnership with Goldman Sachs and Mastercard to support credit, prepaid, transfers and debit through a single mobile wallet. The card is also a key that opens Apple's entire universe of online shopping, commerce and streaming content — adding most of what a bank does to a business that resides entirely outside of finance, at least in the consumer's imagination.

Google is working on a similar project, though without the credit. Google also plans to offer checking accounts through its mobile payment app with a potential move to added digital shopping and incentive marketing tied to Google's search and advertising power.

Writing for PaymentsSource, Heidi Liebenguth, lead at Crone Consulting, said the pandemic's push to digital payment and commerce will accelerate embedded payments and banking. Google, for example, uses partnerships with Citibank and Stanford Credit Union to enable account opening through other parties' online platforms. The existing enrolled consumer bases use prevalidated credentials from one platform to instantly onboard in another platform, Liebenguth wrote. That makes Google, Facebook, Amazon and traditional banks potential players in enabling embedded payments and financial services for other businesses.

The trend is also apparent at ride sharing apps like Uber and Grab, which have been incrementally adding card accounts and other financial services that build on top of their massive and fast-growing bases of enrolled users.

"Consumers want to access financial services through a brand they already love," Marmor said. "They want to go to Uber or Google to get an account … today's brand wants the embedded financial service experience. They want the credit card experience to live in their app."

That places pressure on both traditional banks and other companies that rely on digital transaction rails and a base of recurring users. These companies will need to power connections that embed one type of service with another. It's the crux of the PSD2 and other open banking rules in progress in markets such as Australia.

"On the one side of this you have traditional banks and payment processing rails, and on the other side you have the fintechs and other brands that want to build the next generation of financial products," Marmor said, adding part of Wirecard's ethos was the democratization of financial services.

Using embedded financial services for credit cards is just one option, according to Michael Meyer, a managing partner at MiddleGame Ventures, a fintech investment firm with offices in Luxembourg, Dublin and Washington, D.C. "There will be insurance, investments, savings, there are lots of financial services that can be offered in a platform model. That makes the growth exponential because you can add a new product every year."

MGV participated in a $37 million investment in Railsbank earlier in November, along with Ventura Capital and about a half dozen other VCs. Railsbank will use the funds for its pending credit card as-a-service product and expansion in Southeast Asia. MGV in late 2019 announced a $165 million fintech-focused fund that is looking for investment and partnerships with startups, with an emphasis on regulation, digital ID, data and crypto-enabled infrastructure for banking, asset management, insurance, payments and capital markets.

"We've seen what happened in the payment market with Apple Pay," Meyer said of a nonpayment company using its base to launch a payment rail. "You'll start to see that happen with non-financial services companies offering financial products."