Fintech is exploding.
It is a global industry, striving to change the future of finance.
…And the future is now. At Kurtosys, we’ve set out to cover exactly what’s happening in the financial industry the world over, one country at a time. With so many places contributing to the advancement of our digital world, each deserves their own time in the spotlight.
Following on from the latest in France’s fintech efforts last time around, Germany is also one of Europe’s largest economies, and unsurprisingly doing its very utmost to rival the UK and France in the fintech space. Whilst regulatory burdens have notoriously slowed processes for startups, the methods undertaken by German banks to curb these are enforcing the country’s stance as an up-and-coming and formidable fintech outfit.
Backpfeifengesicht: a great German word (roughly meaning ‘a face that deserves a slap’), but luckily there aren’t too many of these long-winded phrases to keep this piece a bit of easy reading. But how about
Ok, that’s all for the long words. Other German idiosyncrasies include the fact that, in Bavaria, beer is considered a foodstuff, and the Germans are the second largest beer drinkers in the world, with Munich’s Oktoberfest being a global landmark for beer appreciation, first set up as a wedding celebration. The Germans know how to celebrate properly. In fact, Germany is a country that like to do things big: not only is it the largest economy in Europe, but Berlin is home to Europe’s largest train station too. As is customary here in the World Series, innovative German products include the modern automobile engine, aspirin, gummy bears, the television and the chip-and-pin card. Plus, famous Germans include world-renowned genius Albert Einstein, serial nihilist Friedrich Nietzche, deaf composer Beethoven and Adolf Dassler (the founder of Adidas). I’m a massive fan of the Bundesliga (shout out to Mainz!), with the German national team being a dominant force in this day and age. They’re fantastic at taking penalties. The less said about England’s U21 defeat to them the other week the better (unlucky lads).
Going back to economic factors, Germany is (again) a highly successful player in fintech, or at least starting to be since around 2015. In 2017, Statista notes that the transaction value in the fintech market amounts to US$115,016m, expecting to have an annual growth rate of 9% (which will total US$162,616m in 2021). The average transaction per fintech user amounts to US$1,757.89 this year, too.
To gain a more holistic view of Germany’s tech efforts, EY published a 2016 report assessing the national scene. In that year, the entire market was worth €2.4 billion, and whilst total investments peaked at €1.2 billion in 2015, €524 million worth was invested in fintech, with the Credit and Lending sector taking the lion’s share of €402 million. This is a huge increase from 2014 where only $82 million was invested (according to the Digital Finance Institute). The industry has approximately 13,000 staff across over 400 startups (which grew 33% between 2015-16), and it is reported that there is a growing focus on B2B – a wise move considering the increasing need for financial efficiency between businesses and markets cross-border. Speaking of expanding beyond borders, Germany second-ranked fintech hub, and one that had the highest growth rate in Germany in 2015 (22%) – the Rhein-Main-Neckar region – is close to the headquarters of many financial services providers, and has a strong regional infrastructure considering its abundance of universities. It also has notable collaborative efforts with various international fintech hubs through joint university projects and events, including Tel Aviv, Singapore and South Korea.
And within this region is one the globe’s most up-and-coming financial hubs, Frankfurt, as noted by Deloitte’s Hub Review 2017. In fact, Frankfurt is already home to over 300 banks, and both the European Central Bank and the German Federal Bank call the city home. It has adopted the slogan “The City of the Euro” since 1998, the Largest Stock Exchange on the continent is also situated here (Deutsche Börse Group) and Darmstadt is the leading European hub for IT and cybersecurity in the Frankfurt Rhine-Main region. Furthermore, Frankfurt is in close proximity to major EU regulatory bodies, foreign banks (besides the country’s own) and the Mittelstand unit (a collaboration of SMEs), which act as potential clients. All of these factors have led to Deloitte giving it an Index Score of 46, and ranking it the 19th biggest global financial centre and 10th on the Global Innovation Index. Between 2014 and 2016, according to Allen Overy, 31 fintech startups were established in Frankfurt alone, most of them last year too; the fastest pace of any German city.
However, that’s not to say that Frankfurt leads the way in German financial matters. In fact, Berlin is still very much in the lead (for now), as Barkow Consulting shows here. Much of Germany’s fintech acceleration though is down to the efforts of multiple cities. Here’s a list of the significant cities in regards to their innovative sectors and investments; English and German infographic version can be found by following the link above.
Germany’s top 10 fintech locations, ranked by number of startups (from Sept 2016):
- Berlin: 179
- Munich: 62
- Frankfurt: 58
- Hamburg: 53
- Cologne: 19
- Düsseldorf: 13
- Stuttgart: 8
- Leipzig: 5
- Dortmund: 4
- Dresden: 4
Germany’s main fintech locations, ranked by venture capital investments (between 2012 and 2016):
- Berlin: €734m
- Hamburg: €212m
- Munich: €155m
- Frankfurt: €48m
- Düsseldorf: €35m
- Cologne: €20m
- Heidelberg: €19m
- Mannheim: €6m
- Aachen: €5m
- Leipzig: €5m
The number of startups, broken down by sector:
- Berlin: PropTech – 62 / Financing – 41 / Other – 36 / Payments – 16 / InsurTech – 13 / Accounting – 11
- Munich: PropTech – 18 / Other – 15 / Financing – 12 / InsurTech – 6 / Payments – 6 / API Banking – 5
- Frankfurt: Financing – 18 / Other – 13 / Investment – 12 / InsurTech – 6 / PropTech – 5 / Payments – 4
- Hamburg: Other – 18 / Financing – 15 / PropTech – 14 / Investment – 6
And finally, the number of venture capital rounds, broken down by sector:
- Berlin: Other – 37 / PropTech – 36 / Financing – 27 / Accounting – 22 / Payments – 20 / InsurTech – 13
- Munich: Other – 23 / PropTech – 11 / InsurTech – 5 / Payments – 5 / Financing – 3 / API Banking – 3
- Frankfurt: Investment – 7 / Financing – 3 / Payments – 2 / InsurTech – 2 / PropTech – 1
- Hamburg: Financing – 10 / Investment – 7 / PropTech – 4 / Other – 2
Evidently, the top 4 is a constant tussle between Berlin, Hamburg, Munich and Frankfurt, with Berlin taking a fairly strong lead. Whilst this all sounds like a bit of a competition, the fact that each city has a clear spread of investment between a vast array of fintech sectors shows how diverse, all-encompassing and forward-thinking these German cities are. Frankfurt seems particularly keen on financing and investment, whereas the other big hitters focus largely on proptech and payments.
Germany’s main pain point, which is notoriously slowing the ease of progression for startups, is that regulation is extremely tight. For starters, the copyright and data protection laws are exceedingly strong; 50% of startups reported that the regulation has hindered their growth. For fintech startups that are specifically within the online and mobile banking sectors, in-person onboarding is key for anti-money laundering laws. For startups, the acquisition of a banking license has to be done through the Federal Financial Supervisory Authority (BaFin, or in German, the Bundesanstalt für Finanzdienstleistungsaufsicht – I didn’t keep my promise of ending the long words), whereby companies have to implement controls to supervise “fraudulent activity”. It’s a long, complex and expensive process, which in turn dissuades venture capitalists from making major investments. This is of course a problem plaguing many fintech hubs, but many are finding ways to change regulation.
In Germany’s case, it is through the curbing of these rules that these startups can begin to flourish. Traditional banks in Germany are exceedingly active in the acquisition of startups, and their use of investment funds and the allowance of startups to use an existing payment network are an effort to subside regulatory hassle. Also, as a result of the German Banking Act (Kreditwirtschaftsgesertz), fintechs are allowed to offer loans if they partner with a bank. One forward-thinking bank, Deutsche Bank, has opened its Innovation Labs in Berlin, London, New York and Silicon Valley, expecting to spend €1 billion in the next five years and Commerzbank has its Main Incubator situated in Frankfurt, and has a venture arm – CommerzVentures – which has relationships with fintechs including TraxPay, Gini, IDnow and Finture, according to Let’s Talk Payments. Both banks have also joined the international consortium R3CEV, striving to improve the “development of mid-term solutions” for blockchain technology. Berliner Volksbank, in other news, has opened a venture capital enterprise called Berliner Volksbank Ventures, and a digital bank called SolarisBank offers financial regulatory advice to startups too (more from them later). A big online-bank-success-story is Number 26, which is now open to users in France, Greece, Ireland, Italy, Slovakia, Spain – a marvellous European borderless banking platform. It has 6,000 cash outlets, garnered 160,000 users in 15 months and is the first bank account that can be managed from a smartphone. You can open an account in 8 minutes due to real-time identification using IDnow.
The highest investment fund in Germany is High-Tech Gruenderfonds, which has invested €576 million since 2005 in a variety of sectors; it has 7 fintech companies in its portfolio. Elsewhere, co-founder of Paypal and early Facebook investor Peter Thiel has a keen interest in German fintech, and certainly isn’t shy to invest in it either, despite caution from other investors due to the regulatory pitfalls. Thiel invested €15 million into Zinspilot (an interest rate comparison platform) and participated in the Series C funding round of Hamburg’s Kreditech, which totalled €82.5 million. Other notable investors in Germany include Acxit Capital Partners, Brockhaus Private Equity and Creathor Venture.
To cap off the article, here’s a lovely list of German fintech startups, starting with those featuring in the KPMG Fintech 100 2016 report:
#29 – Spotcap – An online credit platform for small businesses, which uses credit scoring technology and real-life business data to allow businesses to fund their projects quickly and easily. It offers loans from €500 to €150,000. With its headquarters in Berlin, it was founded in 2014 by Toby Triebel (CEO) and Jens Woloszczak (COO).
‘Emerging star’ – PAIR Finance – An accounts management and collection service which offers a data-driven solution to the debt collection sector. It uses machine learning technology to offer bespoke solutions to fit debtors’ behaviour, and was founded in 2015 by Stephan Stricker (MD). It is also based in Berlin.
‘Emerging star’ – solarisBank – The aforementioned API-accessible banking platform for the digital economy, which allows fintechs and startups to manage financial needs. Founded in 2016 by Andreas Bittner and Marko Wenthin. Unsurprisingly, its headquarters are in Berlin!
awamo GmbH – A mobile microfinance management solution for microfinance institutions in emerging markets, with operations in Frankfurt and Kampala, founded by Benedikt Kramer, Philipp Neub and Roland Claussen. Its HQ is in Frankfurt.
CreditShelf – A marketplace that connects investors and borrowers to share information. It focuses on unsecured loans from €100k to €2.5m, founded in 2014 by Christoph Maichel.
Ginmon GmbH – Automated investment services allowing uses to control their investment profile and generate strategies, with a technology portfolio consisting of risk management and anticyclical investment. Founded in Frankfurt in 2014 by Raphael Vosen, Lars Reiner and Ulrich Bauer.
Kreditech – A lender that uses machine learning (20,000 data points), and offers consumer loans, a digital wallet and personal finance manager to improve financial freedom for the underbanked. With its HQ in Hamburg, it was founded in 2012 by Alexander Graubner-Müller (CEO) and Sebastian Diemer.
Vaamo Finance AG – A fully digital robo-advisor which instructs private individuals on how to invest money cheaply and profitably, founded in 2013 by Dr Yassin Hankir and Oliver Vins. Its HQ is in Frankfurt.
As a report by McKinsey predicts, “by 2020 almost half of all German bank customers will have opened a digital bank account.” The Deutsche Digital Banking Revolution is certainly underway, and as the country’s regulatory hurdles for startups are lessening day-by-day and with Frankfurt, Berlin, Munich and many other cities being attractive tech hubs, post-Brexit German fintech could become one of the biggest on the European scene.
If you have any thoughts about fintech in France, let us know in the comments below, or you can tweet us.
Check back soon for more instalments of The Fintech World Series!
*A compound word for the ‘Association for Subordinate Officials of the Head Office Management of the Danube Steamboat Electrical Services’. Very rogue.