Aversion to risk hampers growth of German fintech sector

The bulk of innovation has focused on consumer-facing finance

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Last year fintech really caught the imagination of investors. Around the world, $12.2bn was poured into groups applying new technology to the world of finance, according to Accenture. That was three times the level invested in 2013.

Fintech’s rise has been driven by a variety of factors. Perhaps the most important is the inexorable rise of mobile technology, which has encouraged consumers to organise increasing parts of their life online. But other factors such as low interest rates have also played a role, by making start-ups a more attractive investment for those with capital at their disposal, and few attractive sources of yield.

Many of the biggest investments in 2014 came in the US, where Lending Club, the world’s biggest peer-to-peer lender, raised $865m in a stock market listing, and where KKR and other investors injected a total of $3.5bn into the payment processing company, First Data Corp.

However, Germany, which has a vibrant start-up scene in its capital, Berlin, also has an array of fintech companies it can point to. Last week, Kreditech, which provides credit and banking products for consumers who have little or no credit history, raised €82.5m in a funding round involving investors such as JC Flowers.

Other fintech groups attracting attention and funding include Weltsparen, which allows savers to switch their money between accounts in different countries to take advantage of the various interest rates paid on deposits; and WebID, which allows customers to sign up for bank accounts by identifying themselves online, thus sparing them a trip to their local branch or post-office.

Asset management and insurance are also in fintech’s crosshairs. One fintech group going after the insurance market is Clark, which helps customers keep track of and optimise their insurance policies online, a smart move in Germany where adults have, on average, five insurance contracts.

So far, the bulk of the innovation in the fintech sector has focused on the consumer-facing parts of finance, such as transaction services, balance checks and peer-to-peer lending.

However, this balance could well change, as the established banks start to play a larger role in the sector. Commerzbank, Germany’s second-largest bank, which invests in start-ups through its Main Incubator and CommerzVentures entities, has so far made five fintech investments in a variety of companies, some of which could have applications for either private or corporate clients.

Deutsche Bank, Germany’s largest lender is also entering the fray. It plans to open innovation hubs in London, Berlin and Silicon Valley to try to improve its use of digital technology.

According to Phil Gilligan, who is in charge of the project, Deutsche’s hub in Berlin is likely to focus more on applying fintech ideas to retail banking, while the hub in London will experiment with technologies that could have applications for other parts of the bank. The focus for the Silicon Valley hub has not yet been set.

In aggregate, however, investments in German fintech are lagging behind the levels seen in other European countries. According to Accenture, German fintechs attracted $82m in investments in 2014. That compared with $306m in the Netherlands, $345m in the Baltic region, and $623m in the UK and Ireland.

People involved in the fintech scene cite a variety of reasons for this shortfall. One, says Christopher Oster, chief executive of Clark, is that some German investors tend to be more risk-averse than their peers elsewhere.

Another problem is regulation. Entrepreneurs say that German financial regulators often err on the side of gold-plating their rules, which can make it harder for start-ups to thrive.

One example, says Thomas Fürst, managing director and founder of WebID, was Germany’s interpretation of a European rule that people wishing to open a bank account should identify themselves “face-to-face”. This, he says, forced banks and consumers to follow a laborious process of identifying themselves in branches, rather than online.

Bettina Orlopp, head of group development and strategy at Commerzbank, takes a similar line. “Consumer protection rules are tougher in Germany than elsewhere . . . There is a lot of talent in Germany, but it’s not necessarily the first place you would try out new products.”

However, Germany also has factors in its favour. Although language barriers can make it more expensive for fintech groups to expand in Europe, rather than in the US, for example, Germany is still Europe’s biggest single market, giving access to a population of 80m.

The presence of Frankfurt, one of Europe’s main banking centres, is also a boon for those interested in financial innovation. And a well-educated population also helps.

Those start-ups that do succeed will transform the face of banking, says Jürgen Moormann, professor of bank and process management at the Frankfurt School of Finance and Management. “Most fintechs will die. But some will prosper, just like direct banks 20 years ago,” he says, referring to the online-only lenders that have challenged the branch-based model of traditional banks.

“People said then that they had no chance. But now they are established.”

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