Something is happening in Germany. The local FinTech industry is up-and-coming - objectively so. While, for some time, the domestic FinTech scene was not commonly known for its breathtaking speed of innovation, things are changing rapidly.
Within the last few months there has been a significant uptake in activity within the German FinTech industry:
- Deals and investments: In Q1 2016, investments into German FinTechs soared. A respectable €107 million was invested in local companies, up from €10 million one quarter before (more). And this trend of growing investor appetite was already on the horizon last year. While across Europe, overall FinTech investment more than doubled between 2014 and 2015 (+120%), investments in German FinTech ventures grew by staggering +843% over the same period (Source).
- Mergers between FinTech start-ups: P2P lender Kapilendo and equity-based crowdfunding site Venturate announced their merger in April 2016 (more). Around the same time, Berlin-founded payleven and SumUp merged to form one of Europe's largest payment FinTechs (more).
- New business models: The first Banking as a Service (BaaS) platform just launched in Berlin: Solaris Bank aims to provide an API-based banking platform for FinTech startups - uniquely built on the basis of a fully regulated German banking license (more) - see also Pascal Bouvier's in-depth analysis here)
- International growth: More and more German FinTechs are growing up and becoming international players. FidorBank recently started to offer its services to UK customers (more). Berlin-based Spotcap is targeting SMEs in Spain, Australia and the Netherlands. Despite the recent controversy, Number26 continues to expand into 6 other European markets.
What is more, German financial institutions themselves are at the forefront of this new FinTech momentum. Here are some examples of how they are spearheading the current movement:
- Take-over of FinTechs: The 220-year old German private bank Hauck & Aufhaeuser just acquired one of the largest local robo-advisors easyfolio in May 2016 (more). Deutsche Boerse took over trading network 360T, one of the rising stars in the German FinTech scene, in October 2015 (more).
- Minority investments: CommerzVentures, the investment vehicle of Commerzbank, has already completed more than a handful of FinTech investments. In May 2016, the 4th largest German bank by asset size, DZ Bank AG, completed a 25% investment into the invoice marketplace company TrustBills (more).
- Partnerships with FinTechs: Germany's largest bank, Deutsche Bank, just announced three strategic partnerships with domestic FinTechs: In the near future, Deutsche Bank's customers will be offered robo-advisory services (in cooperation with Fincite), multi-account aggregation (partnering with Figo) and European short-term deposits as investment opportunity through the Deposit Solutions platform (more).
- Business model innovation: In April, Germany's second largest bank, Commerzbank, announced that it was working on a disruptive online P2P lending platform for small businesses (more). The nation-wide Savings Bank Finance Group (DSGV) seems to be silently developing a mobile-first bank for the young generation - codename 'Yomo' (more). And many expect further news from Deutsche Bank which just opened up its new Silicon Valley-based Innovation Lab in April 2016 (more).
This activity is supported by an evolving national FinTech ecosystem which is now coming together:
- Innovation facilitators: A number of players and incubation programs are nurturing innovation all over 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: Equally promising, 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 (more).
- Supportive regulatory environment: The German Finance Ministry has just launched its own FinTech forum, the so-called 'FinCamp' as a forum to foster mutual dialogue between various players. The first event 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) (more).
- Industry collaboration: The conservative German private banking industry association (Bundesverband deutscher Banken) has taken an explicit stand to make FinTech a priority from 2016 onwards (more). 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 (more).
Taking it all together - in 2016, the ground seems to be prepared for German FinTech to finally take off. Reason enough for McKinsey & Company to publish the first major analysis on FinTech in Germany: McKinsey & Company (2016): Challenges and Opportunities for FinTech in Germany. How digitization is transforming the country's financial services sector.
In this whitepaper we analyze the magnitude and some underlying drivers of the FinTech phenomenon in Germany. The recent momentum should not come as a surprise. Germany is an attractive banking market to tackle. More than 80 million people, a vigorous SME segment ('Mittelstand') and world-class corporates have a need for modern banking services. In the corporate banking segment there is still ample opportunity for new disruptive solutions.
A lot of further potential remains for both FinTech companies and banks if they successfully adapt to this new paradigm.
Daniel Drummer is a management consultant for McKinsey & Company specializing in the areas of FinTech and disruptive technology. He is an Oxford MBA graduate and holds a master's degree (LLM) in corporate law.