But what makes German fintech tick?
German fintech activities and the development of a fintech ecosystem have started later compared to other global regions. Unlike the United States and the majority of the EU, the fintech ecosystem in Germany is a highly decentralized ecosystem with Berlin, Munich, Hamburg and Frankfurt as independent thriving hubs for fintech innovation and growth.
According to Alexander Hoeltmann, management consultant at Accenture, the driver of fintech evolution in Germany is lack of customer-centricity, speed and agility of traditional banks. According to Hoeltmann, it is because of these factors that fintech firms, therefore, look for singular use cases solutions consequently designed around the customer.
Ernst and Young have analyzed this fragmented fintech landscape and segmented the fintech ecosystem into 3 regions as outlined by the following graph, with Frankfurt coming in under the latter part of Rhein-Main-Neckar region and Hamburg essentially a part of the Berlin ecosystem.
The development of the fintech infrastructure is further fuelled by Berlin’s entrepreneurial culture as well as Germany’s strong economy. The test now is whether it and other German cities including Munich, Frankfurt and Hamburg can sustain the recent high level of investor interest.
Let us take a closer look at the factors that drive this fintech Ecosystem: British people sometimes complain about how centralized the economy is with London the UK economy but for fintech, this centralized base is a huge advantage, making it easy and efficient to gather techies, bankers, investors and digital growth hackers all in one room. Germany, on the other hand, as mentioned earlier, is quite fragmented in its fintech ecosystem as well as its economy with hubs such as Munich, Berlin and Frankfurt occupying characteristically different segments of the economy. But Germany does have its own set of advantages that pave the wave for its fintech boom:
Germany has a massive economy and shares borders with German speaking neighbors in Austria and Switzerland. Germany may not be as big a domestic market as America (#4 in GDP ranking) but it is one large homogenous market and while the independent states in America still have a lot of local regulatory power when it comes to finance, Germany is part of the European Union, which in aggregate, is a bigger market than the US and more homogenous when it comes to financial regulation. As a result of such a large domestic market, the consumer focused service providers tend to stay within Germany for a long time, allowing them to establish themselves and the product without early unnecessary international exposure and media attention. For example, SOFORT has a name that is clearly designed to resonate with German speakers and would sound strange to American ears. SOFORT grew quietly and were then acquired by Klarna. Many German fintech ventures have grown without any splashy VC funding rounds that get covered by the tech media. This is true across Europe (for example, Saxo Bank from Denmark).
This allows for the establishment of an ecosystem that has fintech ventures which are bigger than one would guess from the lack of name recognition. Many are B2B (white label), which means they don’t spend any time or money getting name recognition among consumers. For example, 360T was reported as trading $55 billion FX trades per day in March 2013. This makes Germany prime hunting ground for Growth Equity Funds such as Summit and General Atlantic that like to invest large amounts when a company is already well established and then help them grow as a private company.
Cliché as it may be, Germany does, in fact, have fantastic engineering infrastructure both at the production and education level. This is complemented by the notion that Germans have a deep aversion to hype. They prefer engineering to marketing and cash to plastic. German Banks were deeply wounded by the hype and shady marketing of subprime assets hence many German fintech startups view engineering as the best way to fix the broken global financial markets reflecting a very high focus on product development and refinement versus publicity and marketing which allows for long term utility for their products and services, a quality that is very attractive to potential investors worldwide.
Furthermore, the fintech ecosystem is vibrant and rich in its support systems:
- Innovation facilitators: A number incubation programs are nurturing innovation in Germany. Those include the Comdirect Start-up Garage, FinLab AG, FinLeap, the UniCredit innovation lab, main incubator as well as Deutsche Boerse's brand new fintech hub, just to name a few.
- Sizeable domestic investors: 2016 is seeing the rise of corporate investors such as METRO Group, getting involved in fintech. New local growth equity funds such as the recently launched Digital+ Partners fund are emerging. They are epitomizing a new generation of German fintech investors who are able to back larger investment rounds.
- Supportive regulatory environment: The German Finance Ministry has recently launched its own fintech forum, the so-called 'FinCamp' as a forum to foster mutual dialogue between various players. The first event, held in April 2016, was attended by 150 representatives of German fintech start-ups, banks and associations, as well as staff members of the Finance Ministry, Deutsche Bundesbank and the Federal Financial Supervisory Authority (BaFin).
- Industry collaboration: The German private banking industry association (Bundesverband deutscher Banken) has taken an explicit stand to make fintech a priority from 2016 onwards. While a formal membership is still not up for grabs for Germany's fintech companies, a number of them were invited by the BdB to a joint communication forum in April 2016 - a widely noticed move with positive symbolic meaning.
- Public investment money: Germany's largest public bank, KfW launched its first-time €225 co-investment vehicle coparion in March 2016. The ambition is to support German growth companies, explicitly targeting the fintech segment. The public fund is able to provide risk capital of up to €10m per company.
Looking towards the future, banks are in a good position to keep pace with their disruptive competitors. Large customer base allows them to implement new digital solutions quickly and highly efficiently at scale. Beyond this, many banks have a broad product portfolio and strong, trustworthy brands, which is particularly important in asset management.
According to Mariusz Bodek, Head of Comdirect Start-Up Garage, a technology incubator in Hamburg, Germany, “the German fintech ecosystem is strongly driven by the regulatory environment and the need to get access to customers. Compared to other countries it is much harder for startups to achieve market maturity. That’s why the majority is seeking cooperation with established banks – a) because they often need a kind of liability umbrella and b) they would like to sell on established customer bases in order to avoid regular customer acquisition costs. Although some characteristics of the German market seem to be tougher than elsewhere, the German fintech landscape is exploding right now. More and more use cases are attacked by startups and that is what drives innovation on both sides – the banks and competing fintechs.”
In this regard, the German Banking Act (Kreditwirtschaftsgesetz) offers numerous advantages (McKinsey). For example, fintech startups in Germany are only allowed to offer loans if they collaborate with a partnering bank. This could lead to new business partnership opportunities which contrasts with the increasingly competitive environment that is prevalent in Europe (see graph below).
Crowd Valley is committed to the German market and sees its importance increasing in the near term for financial institutions and fintech innovation in Europe. We invite like-minded company to reach out and work together with our ecosystem, in realizing a material vision for fintech across the European continent.
Adit Vaddi is a business development associate with a Bachelor of Arts in Economics from Vassar College, New York. He has a background in Economics, Accounting, Political Science and Operations (Event Management). He is from Hyderabad, India. Prior to Crowd Valley, Adit has worked as a research analyst for Baring's Private Equity Partners in Mumbai and for the IdeaSpace Foundation in Manila as well as a risk analyst for Fincare in Bangalore. On the operations side, Adit has organized and run over 30 large scale events that cater primarily to a college community. He is currently based in New York City.