2017 — The Year German Fintechs Grow Up
2016 was a fascinating fintech year for me — not least because we launched solarisBank, the banking platform for finance pioneers. Among all the bustle, I noticed a significant development in the sector that will continue in 2017: German fintechs are growing up. Their business models are maturing, they’re receiving more investment than ever before, they’re expanding internationally and they’re increasingly integrating with the mainstream as well as one another.
German fintechs step up to the regulatory plate
Sandbox or no sandbox, several German fintechs applied for and successfully received various financial licenses last year. Both solarisBank and N26 received full banking licenses and embraced the regulatory oversight and compliance duties required to keep them. Several fintechs also received more specialized licenses necessary for their business models. For example, Vaamo was granted the license to operate as an asset manager while RatePay received the ZAG license (payment services license).
This is a sign of increased ambition among fintechs to compete in mainstream, regulated banking and finance. It’s also a sign of maturity that fintechs are successfully demonstrating the ability to comply with regulation and are taken seriously by BaFin.
Investment in fintech grew rapidly and is going strong
Germany is now home to over 450 financial sector startups with Berlin quickly establishing itself as one of the world’s fintech hubs. German fintechs are now competing in nearly every financial sector.
Growth in German fintech is partly due to increased attention from investors. 2016 was a banner investment year: German fintechs raised at least more than three times more funding in 2016 than the previous year.
In order for that trend to continue into 2017, fintechs are going to have to bring evidence for the sustainability of their business models. What are their strategies for turning their startup into a profitable business? Smava is a good example: they started as a crowdlending platform in 2006 and have reinvented themselves as a comparison tool for private loans.
Focusing on less sexy, but more profitable niches
The most talked-about fintechs are often the B2C companies, but that isn’t necessarily where all the opportunity is. Highly focused B2B fintechs like figo, FinTecSystems, WebID and IDnow were very successful in 2016 and that trend will continue into 2017.
One segment that will get increased attention in 2017: fintech services for small and medium-sized enterprises (SMEs). SMEs are the backbone of the German economy and they are underserved or inadequately served by traditional banks. Even though some fintechs like Kontist, Holvi, Lendico and Funding Circle have already begun focusing on SMEs, in my opinion, there’s a lot of ground to cover. Integrating banking services, directly into SME value chains will create the next-level of SME-fintech cooperation. Automation around predictive financing in combination with accounting and collateral management rather than traditional static lending will be cornerstones of such development.
Maturity through international expansion
Europe has come a long way in harmonizing financial regulation, but it remains a patchwork in many areas. Regulation still varies significantly from country to country, which poses a challenge to fintechs aiming to grow. So far, Savedo, Weltsparen, Cringle and Finreach have expanded to other countries, or aim to, but they’ll be the first to tell you it isn’t easy.
The trend of increased European integration was stopped cold by Brexit, and there’s a possibility we could go backwards if France chooses anti-European leadership this year. The UK is a huge fintech market, and Europe is still in suspense about the future.
If fintechs don’t have an eye towards internationalization, I don’t see them being successful. Each niche has its own particular regulations and each country its own regulator, some more progressive than others. Successful fintechs will be forced to develop strong regulatory competencies with regard to internationalization.
Successful fintechs will mature by connecting to the industry and each other
For me, the future of fintech will be based on an interconnected ecosystem rather than single streams. You can see this rich collaboration taking place already through deals between Vaamo and N26, and existing banks and fintechs like Finreach, figo, FintecSystems and IDnow.
The banking as a platform (BaaP) model will accelerate this process, bridge the gap between the old and new financial worlds, and create an ecosystem for fintechs to:
a) obtain the necessary licensing, infrastructure and other services (e.g. KYC) through a banking partner so they can get to market quickly,
b) connect to traditional companies such as incumbent banks
c) and connect to each other making use of the advantages of each business model.
This will reduce costs for fintechs, allowing them to reach profitability quicker, as well as give them access to existing banking powerhouses as new customer segments. As platform ecosystems grow, network effects will make them even more valuable for fintechs.
I think fintech in 2017 will see more platform models emerge e.g. in the insurance or RegTech space, enabling opportunities to scale faster.
The disappearance of fintech
Ok, this may take a little longer than 2017, but we’re seeing the beginning of the gradual disappearance of fintech. In 2016, banks and fintechs worked together more closely than ever before. Now, the majority of fintech deals are actually between fintechs and banks. Even John Cryan, CEO of Deutsche Bank, stated last year that every bank has to become a tech company and should increase cooperations with fintechs in order to become agile and innovative more quickly.
In 2017, we’ll not only see more alliances between fintechs and banks, but increasing integration into the value chain of many different industries — a start of a new financial industry which no longer differentiates between “banks,” tech companies and other players. Thus, fintech as a standalone industry will slowly but steadily disappear. I see it as absolutely necessary to make fintech truly mainstream and fulfill its main purpose, the (r)evolution of banking.
With that, I wish you all lots of energy to make 2017 a successful one. Let’s get some work done.
