Fewer fintechs, increasing willingness to invest

Germany Finance and Startbase publish the German Fintech Report 2021

In Germany, the will to found fintechs is declining. At the same time, investors have never been so keen to support financial start-ups. This is shown by recent figures from Germany Finance and Startbase. Is Germany just squandering a huge opportunity here?

When the term fintech comes up, investors get fired up. Many of them are willing to invest millions in technical innovations on the financial market. This was revealed by the "German Fintech Report 2021" by Germany Finance in cooperation with Startbase. The study shows: Currently, it is particularly lucrative to develop a good idea in the field of financial technologies, investors are significantly more generous than in previous years. The number of financings has increased by an average of six percent per quarter since 2018, one and a half times as much as in the entire startup ecosystem (four percent per quarter). At the same time, fintechs have been able to close large funding rounds much more frequently than startups in general. This can be seen in fintech giants such as online broker Trade Republic, which raised more than €4.4 billion from investors, or direct bank N26 with €3.5 billion.

The study by Germany Finance was produced as part of the Germany Finance initiative. The platform networks regional financial centre initiatives across Germany and aims to make the Federal Republic of Germany more visible nationally and internationally as an attractive financial centre. One problem: Up to now, there has been no uniform definition of fintechs. As a result, their nationwide number sometimes varies widely in different studies. For this reason, Germany Finance has worked out a common definition with the participating financial centres in order to set a future standard. The report collected more than 1,100 companies listed as fintech from studies, lists, databases and start-up-related media. Only 639 of them meet the narrow definition of a fintech developed by Germany Finance. For example, so-called proptech startups, which deal with technologies on the real estate market, are not included - unlike in many other fintech studies.

Another finding of the study: the market seems to be less attractive for young entrepreneurs despite high investment sums. The trend of fintech startups has been declining over the past three years. Since 2018, the number of financial technology companies has decreased by an average of one percent per quarter - while the number of startups increased by four percent per quarter during the same period. Between 2018 and 2020, there were 243 fintech startups in Germany.

Yet, according to the figures, the lifespan of fintechs is more promising than usual in the German start-up scene: only slightly more than half (55 percent) of fintechs in Germany are less than five years old. This is below the German average for all start-ups, 60 percent of which are younger than five years old.

Every tenth start-up is a fintech

Despite the decline in recent years, the importance of the sector remains enormous. Ten percent of all start-ups in Germany are fintechs. In terms of start-ups, this makes them the second strongest sector in the German start-up ecosystem, after information and communication technology.

Drivers for the market share and business model of fintechs are primarily the topics of artificial intelligence, blockchain and digitalisation. According to a study by Sparkasse, this also makes fintechs influential drivers of digital innovation in the German economy.

German diversity: fintechs show different focuses

The locations of the German fintech scene differ greatly, the study by Germany Finance shows. Ninety percent of all German financial technology companies are based in one of the six major fintech hubs Berlin, Hamburg, North Rhine-Westphalia, the Rhine-Main region, Baden-Württemberg and Bavaria.

It should come as no surprise that the start-up metropolis of Berlin is home to the most fintechs in the Federal Republic. 28 percent have settled there. At the same time, the capital also attracts a disproportionate amount of media attention. According to the latest study by Germany Finance, around 50 percent of the coverage by start-up-related media is about the fintechs based there.

Overall, however, the locations not only show different levels of media attention, but also specific clusters and development trends. The smallest of the six German fintech hubs is located in Baden-Württemberg. Around eight percent of all fintechs have their headquarters there. The state currently does not have a clear cluster of its own with which it could identify. Young Baden-Württemberg fintechs are mainly active in the area of personal financial management. They are companies that, like the Berlin fintechs Fraugster or Bonify, want to help private customers keep track of and manage their personal finances. Young fintechs in North Rhine-Westphalia also focus mainly on this area.

In the Rhine-Main region, on the other hand, young fintechs tend to focus on the area of credit & factoring. This refers to companies that offer customers financing options, such as credits or loans. Well-known in this area is, for example, Smava, an online credit platform whose name is often heard in eye-catching radio commercials.

Otherwise, the Rhine-Main area focuses on asset management & investment in the fintech sector. In other words, fintechs that manage customers' assets or sell securities and other investments. This is apparently a particularly lucrative sector - companies such as Scalable Capital, Trade Republic and Raisin DS raised several hundred million euros for their business model in recent years. All three are considered unicorns, i.e. start-ups that have received a market valuation of more than one billion euros or US dollars. Two of them come from the Berlin Hub, where the focus is on asset management & investment anyway. However, the fintechs that are newly attracted to the capital are more familiar with the field of (API) banking. Among them are well-known names such as N26, which operates as a direct bank and makes account management possible with a smartphone, or Solarisbank.

Hamburg as a strong location for fintechs

Although to date the most successful fintechs have all sprung from the metropolis of Berlin, this could change in a few years. In any case, a study by LinkedIn shows that Berlin is no longer the most popular location for start-ups. According to the Germany Finance Report, young fintechs are also currently mainly attracted to Hamburg. Especially in personal financial management.

At 61 percent, the Hanseatic city has the largest share of fintechs that are less than five years old. Young talent is therefore well represented there. And he is focusing on a new priority: decentralised financial markets, or defi for short. This refers to financial services that are based on blockchain technology. It is also used for digital currencies such as Bitcoin. The aim of these fintechs is to use the blockchain to make the otherwise necessary intermediaries in the financial sector, such as banks, stock exchanges or insurance brokers, superfluous.

Financially, Hamburg benefits from the new generation. Young fintechs account for 72 percent of fintech financing there. As in Berlin, a particularly large amount of investors' money ends up in the Hanseatic city, according to the report.

Stronger focus on private investors and specific products

However, even though the diversity of fintechs is great and they sometimes differ greatly in the individual hubs, there is one trend that can be seen in all of them. Single-service providers is currently the name of the largest group of fintechs, 230 companies in total. Accordingly, 36 percent deal with the offer of a specific product - and are not active in several business areas at the same time. This is particularly evident in the areas of asset management and investment. But also in the area of credit & factoring, the scene is increasingly focusing on breaking down the classic bancassurance provider into different areas. Advice, financing and investment are therefore no longer offered together, but individually.

The report thus reveals a trend towards specialisation in the financial sector. This makes cross-selling, i.e. the exploitation of customer relationships through the additional sale of complementary products or services, increasingly difficult. More customized technologies are also bringing the target group of private investors more and more into the focus of fintech founders.

For some areas, however, pure focus is not the answer. Fintechs that continue to focus on multiple fields call themselves full-service providers. They are mainly still active in API banking. These include Solarisbank or the Munich-based fintech BanksAPI, which offers its customers not only a current account, but also loans or mobile payments, for example.Germany Finance, in cooperation with Starbase, thus shows in the study how diverse the German fintech industry is and where Germany focuses. However, the falling start-up figures give rise to concerns that diversity could decline in the coming years - and that founders of the fintech scene will not be able to maintain their strength of recent years. Because, as the report also shows, there is certainly no shortage of potential backers.

The entire study is available here.