Update: June 2020
EY announced €1.9bn of cash missing, CEO arrested, Wirecard AG filed for insolvency

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What is MCA and why is it important?

June 16, 2019

Merchant Cash Advance (MCA) is a product where a merchant’s payment provider offers a short-term loan to cover the time between a customer making a credit card payment and the funds reaching the merchant’s bank account.

The first mention of MCA by Wirecard management was on the 3Q 2018 Earnings Conference Call on November 14, 2018.

"Additionally, we launched since some time a product called Merchant Cash Advance… It can be between 2 and 5 days that we get the money and then we would normally pay out between 3 and 10 days. To give you also the background in some countries, for example, Brazil, it can even be up to 30 days until we get the money… Starting basically in Brazil, the Brazil portfolio already was going into this direction…" –

We found this timing curious, as the company held an Analyst Day on October 9, 2018 which did not mention MCA once in the 45 slides mainly discussing new product innovations. Hearing about this product that had never been highlighted before move from €200M to €400M over the next two quarters further piqued our curiosity.

The business rationale for MCA as a product was first explained in the 3Q 2018 IR presentation with this diagram:

Hero

When a customer pays with a credit card, as opposed to a debit card, the merchant can wait up to 30 days in some countries to receive payment from the banks. The delay in cash flow causes difficulties for smaller merchants. Rather than wait for 30 days, some merchants opt to receive payment immediately at a 1-2% discount.

Wirecard and other payment providers are effectively loaning the merchant the money, for a period anywhere between 3 and 30 days and earn a monthly return of 1-2% (12-24% annualized) for this risk. This is not risk-free lending; MercadoLibre (MELI) took losses of >20% on their 2018 loans receivable. Source

Understanding MCA is important because Wirecard stated that they have lent €400M to merchants at the end of 1Q 2019. Lending money to merchants is a very recent explanation for why cash conversion remained weak at Wirecard.

Swipe
 3Q 20184Q 20181Q 2019 
Lent to Merchants (€ M) at Qtr end200285400

Wirecard have stated that at the end of 1Q 2019 they had €400M outstanding in MCA loans. This is a snapshot-in-time figure, the amount currently outstanding as of the end of March. If we assume an average 30-day loan period, this represents a reasonable proxy for the loans made in the month of March.

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In which countries is this money being loaned?

The two countries where Wirecard claims MCA has been most commonly used (due to the longer payment terms by payment schemes for credit payments) are Brazil and Turkey, but the exact split between these countries has not been disclosed by company management. Commentary from the company is not explicit, but has been quite consistent in one aspect: the program is predominantly in Brazil.

  • “So, the merchant cash advance product mainly started in Brazil and Turkey. Because in Brazil to give you transparency there is a big latency between the real time authorisation and when there is a real cash out by the banks. It’s up to four weeks. The same as in Turkey, it can be even longer there. Today the portfolio I would say that we already have also small part in Europe and a small part in Asia….”
    Wirecard CEO May 2019
  • “It’s in Brazil, also let’s say Asia Pacific. The Citi portfolio was already doing such things, and so it’s a little bit Asia and we are also starting in Europe.”
    Wirecard CEO March 2019

Consistent with management comments, that the program was “small” in Europe and Asia as of March 31, 2019, is the press release on April 12, 2019 which announced the MCA program to markets outside Brazil and Turkey.” –

Given this information, we need to quantify managements’ statements regarding the location of MCA lending to estimate how much is occurring in Brazil, rather than other countries. We believe 40% of the MCA balance being in Brazil as of March 31, 2019 is a very reasonable estimate. You can make your own estimate to quantify Brazil as a percentage of MCA lending in the white box.

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 Our
assumptions		Your
assumptions
Company reported MCA400400
Quantifying managements comments to determine Brazil % Estimate40%
%
Reasonable Brazil estimate from mgmt. comments160160
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Let’s look at Wirecard Brazil – how big can it be?

Given that Brazil is where Wirecard state the MCA program started, and it allegedly represents a substantial portion of the MCA program, we think it sensible to test this claim.

As previously mentioned, the company is not very forthcoming with data, so we have to make some assumptions. We have used conservative figures given the information we have available, but you can adjust these assumptions.

Any adjustments made will flow through to the end result.

To understand the possible size of the MCA program we need to know the size of the Brazilian business.

We have taken the reported numbers from the Americas and broken them down into what, we believe, are their separate constituents using known figures and estimates.

Americas Reported Revenue (Figures/comments in Bold are as reported by Company)

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 201620172018
Americas & Africa21.7141.4176.4

We can break the above revenues down into the components below. Where we do not have current figures we have estimated year-on-year growth which can be changed.

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 20162017Our
estimated
growth		Our
2018		Your
estimated
growth		Your
2018		 
o/w MOIP aka Wirecard Brazil116.220.987%39.187%39.1
o/w Other5.55.50%5.5
%
5.5
o/w MyGate2–5.90%7.1
%
7.1
o/w CitiNA3–109.10%124.7
%
124.7
CitiNA Full Year Estimate–124.7–––– 
  1. MOIP Full Year 2016 Revenues 18.7M per Annual Report
  2. MyGate Full Year 20'17 Revenues 7.1M per Annual Report
  3. CitiNA acquired mid-March, Full year estimated at 125M (= 109.1 * 12/10.5)

We have accounted for growth in the Brazil business - the currency fluctuations between the Real and EUR have negated much of that growth. showing the impact of the currency.

Taking the stripped out Brazil numbers, we then divide by four to get estimated quarterly revenues.

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 20162017 Our
estimate
2018		Your
estimate
2018		 
Wirecard Brazil Annual Revs (Euro)16.220.9–39.139.1 
Quarterly Revs (Annual /4) (Euro)4.05.2–9.89.8 

Now that we have a reasonable estimate for revenues, we need to estimate how much they are processing in Total Payments Volume (TPV).

To calculate 2018 TPV we need to understand the percentage of payment volumes the company earns as revenues (“Take Rate”). Again we do not have exact numbers but we can estimate it given previous comments from the company. The math is quite simple: Take Rate = Revenue / TPV. Therefore, TPV = Revenue / Take Rate.

We assume a 5% Take Rate estimate using a blend of rates described below and April 25, 2019 Conference call: CEO,

“So yes, of course, very small merchants go up in the take rate if you go to the lowest level, go up in the take rate to 7 to 8%, sometimes [if I take Brazil], for example, as an indication.”

We have also included a June 2019 fee schedule from the company’s website.

Hero

We take the revenue estimate for the quarter and divide it by the Take Rate to get the TPV by quarter. We have used 5% as the example but, again, you can make your own assumptions.

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 Our assumptionsYour assumptions
Take rate5%
%
Total Payment Volume (TPV)195.6195.6

With a TPV estimate, we can now work out the probable MCA balance in Brazil

Approximately 60% of online transactions in Brazil are done via credit card. MCA is only applicable to credit card payments.

Hero

Source

Using this average of credit card usage, we can calculate a monthly credit volume. You can adjust the credit card usage percentage as desired.

We have estimated the % of merchants using MCA to achieve faster payments, as not all merchants use this service due to the high cost. This metric is also adjustable. Note: per company disclosure, 21% of Cielo credit volumes used faster payments in 1Q 2019. For small and micro merchants, industry analysts typically assume 50-75% of credit volumes are accelerated by 14-28 days.

Again this is a variable estimate - we explain how we get to this number, but leave it to you to adjust it to a level you are comfortable with. Finally, management stated numerous times the maximum duration for MCA was one month in Brazil. If you shorten the period, the ending balance will be smaller.

Swipe
 Our
assumptions		Your
assumptions
Brazil Qtrly Revs (From the assumptions above)9.89.8
Take rate5%
%
Quarterly TPV195.6195.6
Credit share57%
%
Quarterly Volume on Credit Cards111.5111.5
Monthly Volume on Credit Cards37.237.2
% of Merchants Using Faster Payments50%
%
Duration (Months)1
Probable MCA Balance18.618.6
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In Summary

Swipe
 Our
assumptions		Your
assumptions
Company reported MCA400400
Quantifying managements comments to determine Brazil % Estimate40%
%
Reasonable Brazil estimate from mgmt. comments160160
Probable MCA Balance18.618.6
Difference - Where is the money?-141.4-141.4

Lending money to merchants via MCA was used to explain why hundreds of millions of Euros were not showing up as cash on the balance sheet over the last 3 quarters. The program that is supposedly lending €400M to small merchants, mainly in Brazil, reasonably cannot be doing so mathematically. If it is not being lent in Brazil, WHERE IS THE MONEY? Does this explain the need for a dilutive $1B investment from Softbank?

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WHERE IS THE MONEY?

Wirecard Brazil (€M)Our
estimates		Your
estimates
Company Reported MCA400400
Brazil % Estimate40%
%
Brazil MCA Estimate160160
 
Revenue (quarterly)9.89.8
Take Rate5%
%
Quarterly TPV195.6195.6
Credit Share57%
%
Monthly Credit Volume37.237.2
MCA Usage50%
%
Duration (months)1
Calculated MCA Balance18.618.6
 
Difference-141.4-141.4