Germany is a strong case in point. It’s no secret that Germany took its time to enter the

scene, especially with investors erring on the side of caution due to the complex nature of

German financial regulations. But now the gap is finally closing on the UK. As Brexit places

London’s ‘EU passport’ in jeopardy – the UK may soon find itself overtaken by Germany in

the near future.

The German FinTech market has already experienced strong growth by more than 70%,

which now includes 250 companies and has generated approximately 13,000 jobs. In 2015,

the UK employed around 61,000 people in FinTech but due to the changing political

climate may now experience difficulties attracting and retaining talent.

In terms of overall investment in FinTech, Germany still lags behind the UK. German

FinTech firms attracted €524 million in 2015, which represented a 133% increase from 2014

in fundraising – whereas the UK attracted €707 million.

With a reputation for economic prudence, Germany may not seem like a country aiming to

disrupt one of the oldest industries in the world. But despite recent setbacks for some

FinTech startups in Germany, the country has the foundations for the FinTech industry to

continue its impressive growth.

With four main hubs in Berlin, Frankfurt, Hamburg and Munich, we take a look at what’s

happening in the German FinTech industry and highlight some developments you

probably didn’t know about before.

What you didn’t knowabout German FinTech

Every year, FinTech gains increasing attention in the international media. Although the UK makes most of

the headlines, there are numerous other countries making significant strides in the industry.

In 2015, the total investment volume in Germany reached over €1.2 billion, with significant

investments of approximately €402M made into FinTech startups focused on banking and

lending.

Even though there is no clear leader for FinTech investments in Germany, co-founder of

PayPal and early Facebook investor Peter Thiel is one of the biggest names in tech to

invest in the German FinTech scene. His most recent investment saw €15 million put into

Zinspilot, a platform for comparing interest rates..

Last year Thiel also participated in a Series C round totalling €82.5 million for Hamburg-

based Kreditech, a startup that offers loans to consumers with little or no credit rating.

This is a bold move, because due to the regulatory complexities in Germany, venture

capital firms and investors have tended to take a cautious approach when investing in

FinTech startups.

For instance, Germany’s leading seed investment fund, High Tech Gruenderfonds, has

invested c. €576M since 2005 and currently has seven FinTech companies out of 305 in its

portfolio. When compared to markets in the US and UK, the FinTech investment scene in

Germany is very much still in its infancy.

But while regulatory complexities prove to be a stumbling block for venture capitalists to

invest in FinTech, banks such as Commerzbank have set up their own funds dedicated to

backing early and growth-stage FinTech companies.

Investments

FinLeap- who recently secured €21M in funding at a €121M valuation - is another investor

focused on building FinTech companies. The company provides up to €5 million in seed

funding, accompanied by talent networking and financial advice. FinLeap are also the

people behind solarisBank, which describes itself as a tech company with a banking

licence. solarisBank was initially founded to provide startups a platform to help navigate

regulatory hurdles and facilitate growth.

Traditional banks have also been active in acquiring startups to add innovative products

and services to their portfolios. In 2015, Sparkasse acquired the majority of shares in

payments provider Payone, where both parties saw the deal as an opportunity to continue

their growth.

Deutsche Bank is another big player in the financial world that has started working more

closely with FinTech startups such as Gini. The German bank opened its Innovation Labs in

Berlin, London, and Silicon Valley where it plans to spend €1 billion over the next five years.

Through its Innovation Labs, Deutsche Bank hopes to unearth emerging technologies to

help improve its existing products and services.

Despite the money flowing throughout Germany, red tape still hinders the development

and growth of FinTech.

Unlike the UK, where the supportiveness and openness of the Financial Conduct Authority

(FCA) has encouraged a number of FinTech startups to be born – Germany’s Federal

Financial Supervisory Authority (BaFin) is considered more complex and more

conservative towards the development of FinTech.

The UK’s goal to become the FinTech capital of the world has contributed significantly to

its present lead. This approach, reflected in policy,has led to the creation of startups like

Monese, TransferWise, FundingCircle and of course, GoCardless. A major component of

that policy includes tax incentives to encourage seed investments, along with

government programmes to support innovation.

But in Germany, the BaFin is still far behind on implementing policies similar to the

FCA’s.For many German FinTech startups, acquiring a banking licence from the BaFin is

considered a path to profitability as it enables establishment of faster processes. But it

also requires startups to implement strict controls and supervision for fraudulent activity.

The application process can be long, complex and costly for recently founded startups,

which discourages venture capitalists from making major investments in the industry.

Regulatory hurdles

Banks are trying to bridge the gap of regulatory hassle through investment funds and by

allowing startups to use the existing payment network. As we mentioned earlier,

SolarisBank was also created to help startups with the financial regulations in Germany.

In the current regulatory climate in Germany, FinTech startups rely on partnerships with

existing financial institutions to help them grow. For instance, Number26 partnered with

acquiring bank Wirecard to facilitate its growth. In addition to providing merchant

accounts to businesses, Wirecard also provided current accounts for Number26 users. But

that partnership will come to an end this autumn after Number26 was recently granted its

own banking licence by the Federal Financial Supervisory Authority (BaFin) and the

European Central Bank.

GoCardless has also experienced growth outside of the UK with partnerships, including

Luxembourg-based MangoPay and most recently Nasdaq Stockholm listed Seamless.

Even with the regulatory hurdles for German FinTech firms to overcome, some very

promising companies have already risen in this space. Banking and lending have attracted

the most investment so far, but other segments such as marketplaces and payments are

expected to continue their growth. Data analytics is another emerging segment worth

keeping an eye on.

Ecosystem

Emerging startups

There has been a lot of talk over the last 18 months about Berlin-based startup Number26.

The company allows anybody to open an online banking account from their smartphone,

and they also receive a free MasterCard. Within 15 months, Number26 has attracted 160

000 users to its application. Number26 initially launched in Germany and Austria, but is

now also available in Ireland, France, Spain, Italy, Greece and Slovakia.

Founded in 2012, Gini is a B2B focused financial data analytics startup. The Munich startup

delivers an API that uses artificial intelligence to enable businesses to automate

paperwork. Through semantic analysis, the API can process documents such as invoice

payments and expense tracking for end users. Among Gini’s partners are several banking

institutions such as Deutsche Bank, Sparda-Bank and ING. Gini and Number26 were also

the recipients of the “FinTech Startups of the Year 2015” award in Germany.

Back in April 2016, FinanzCheck made waves when it announced its €33 million Series C

funding round. Based out of Hamburg, FinanzCheck acts as a marketplace for loans. It

compares up to 35 bank and P2P lender’s scorecards to help customers find the most

suitable loan for them.

Optile offers an open payment platform for online businesses that helps to simplify the

process of integrating multiple payment gateways. The product is mainly targeted

towards enterprises. The Munich-based company was founded in 2009 and has closed

several rounds of investment since 2014

Fidor is another mobile banking application that offers an extensive range of financial

products and provides business bank accounts Fidor also holds a German banking licence,

where it is authorised to hold money and control the payout of funds to its customers.

Launched in Germany in 2009, and used by over 300 000 people – Fidor offers 25

products in Germany such as saving accounts, loans and precious metal trading.

Payworks is a white label payment platform for Point of Sale providers. Founded in 2012

and officially launched in 2014, Payworks enables companies to easily add card readers

into mobile applications. Businesses can also process EMV & contactless payments with

their preferred payment gateway.

Hidden champions

Established players

Founded in 2005, Sofort is an online direct payment method that works similarly to online

banking. People can use Sofort for making purchases online with an online banking

account from most banks. In 2013, Sofort and Swedish payments provider Klarna made

headlines when the German company was acquired for $150M. Today, Sofort and Klarna

still continue to offer their products separate from each other.

Pay.on is another white label solution for payment service providers and acquirers. Its

product enables other financial service providers to outsource the payment transaction

process and improve their existing systems by offering more than 300 payment methods

in over 160 countries. In 2015, US-based ACI Worldwide acquired 100 percent of Pay.on,

valuing the company at €180 million.

Wirecard is a financial services and technology company founded in 1999. Although the

Munich-based company has not been bought, it has been listed on the Frankfurt Stock

Exchange (FSE) since 2005. Wirecard offers a variety of products such as card issuing,

risk management and online credit card processing.

There’s already lots of activity in the German FinTech scene and some of the established

players mentioned earlier have already laid the groundwork. There is massive potential for

Germany to rival, and perhaps even take over from, the UK when it comes to FinTech. The

UK leaving the EU may also pave the way for Germany to take that lead sooner than

expected, with the UK’s so called ‘EU-passport’ in jeopardy. Berlin in particular has been

tipped as a strong contender for London’s FinTech crown, with plans already in place to

‘exploit’ the Brexit move and lure London-based startups to relocate, according to a recent

article in the Financial Times.

Wrapping up

When comparing Germany to another EU country such as France, there are noticeable

trends for certain segments to attract the most investment. In 2015, French FinTech

companies raised almost €80M with €12M going to lending platform Lendix. Mobile

payments startup Tiller who delivers a point-of-sale solution also raised €4M. Just like in

Germany and UK, lending seems to be one of the strongest segments in France, followed

by digital payments and crowdfunding platforms.

What’s interesting to note is that FinTech started off with incremental developments to

improve existing processes, such as making money lending easier. The FinTech industry is

one of the riskiest industries to get involved in as it requires significant capital to launch a

new venture, which is mainly due to development costs and setting up a secure IT

infrastructure to comply with financial security regulations. FinTech startups often get

around this by partnering with existing financial institutions to alleviate the compliance

requirements - a pattern we will continue to see in the future. Entrepreneurs getting

involved in FinTech immediately face the challenge of having to gain traction quickly in

order to cover their costs. This is why you’ll see a lot of B2C FinTech companies popping

up, as it’s easier to sell to consumers than to other businesses.

The B2B segment in German FinTech is still catching up with B2C, but we can expect to

see more enterprise focused solutions in the near future. In the next few years we’ll see a

deeper integration of data analytics into existing FinTech products and services. More

startups will arise that will launch products to take advantage of the available data,

helping businesses to make more informed financial decisions – and helping consumers to

manage their private finances.

But the regulatory landscape remains an obstacle for German FinTech companies to truly

flourish, with investors preferring to get involved in less complex environments such as

SaaS (software as a service). Market pressure, customer demand and lucrative growth

created by FinTech will eventually lead to a more open approach from the BaFin.

Seed funding, expected to grow in 2016, has been the main source of investment for most

German FinTech companies. But in an industry where scalability is essential to becoming

profitable, more growth capital is required to make sure FinTech startups reach that stage.

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Want to learn more? Call 020 7183 8674 Or arrange a call at

GoCardless Ltd. 338-346 Goswell Road, London, EC1V 7LQ, United Kingdom. GoCardless is authorised by the Financial Conduct Authority under the Payment Services

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https://www.gocardless.com/contact-sales

Lets Talk Payments - A blog focused on FinTech, delivering insights from around the world.

https://letstalkpayments.com/

The Finanser - Authored by Chris Skinner, who was named the top FinTech influencer by

the WSJ. Through The Finanser, Skinner delivers independent commentary on global

financial markets. http://thefinanser.com/

CB Insights - A platform which analyses data from a variety of industries (including

FinTech), shares research and insights on its blog. https://www.cbinsights.com/

Gruenderszene - A German publication that picks up on everything that’s happening in the

German startup scene, as well as any new FinTech companies and developments that

spring up. http://www.gruenderszene.de/

The FinTech Rat Pack - Comprised of five FinTech experts who talk about what’s going on

in German banking through their blog and podcast. http://ratpack.one/

To make sure you stay abreast of all the developments in the German FinTech, we suggest

following these websites:

http://www.ey.com/Publication/vwLUAssets/EY-FinTech-study-Germany/$FILE/EY-FinTech-study-Germany.pdf

http://www.ey.com/Publication/vwLUAssets/EY-UK-FinTech-On-the-cutting-edge/$FILE/EY-UK-FinTech-On-the-cutting-edge.pdf

http://www.frenchweb.fr/fw-500-le-top-30-des-fintech-francaises/247400

http://www.businessinsider.de/interview-number26-valentin-stalf-2016-04?r=UK&IR=T

https://techcrunch.com/2016/04/06/german-consumer-loans-marketplace-finanzcheck-closes-e33m-series-c/

https://techcrunch.com/2013/12/18/klarna-sofort/

https://www.finleap.com/pr/pressrooms/show/130219/21-million-euros-for-finleap?locale=en

https://www.payone.de/en/company/press-news/press-releases/the-sparkasse-finance-group-strengthens-its-position-in-e-and-m-commerce-dsv-group-deutscher-sparkassenverlag-acquires-shares-in-payone/

https://www.db.com/newsroom_news/2016/medien/deutsche-bank-opens-innovation-lab-in-silicon-valley-en-11531.htm

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11872292/German-bank-Fidor-launches-in-Britain.html

https://www.aciworldwide.com/news-and-events/press-releases/2015/november/aci-acquires-leading-global-ecommerce-payments-solutions-provider-payon

Sources: