Frankfurt It was a year to forget for the German fintech industry: 2022 was followed by negative news about mass layoffs, bankruptcies and the lack of financing rounds. “It was the most difficult year since the financial crisis,” says Miriam Wohlfarth. She has been part of the industry herself for over 20 years and founded, for example, the payment service provider Ratepay and the loan start-up Banxware.
But anyone who thinks that this phase will be over in the new year will probably be disappointed: “Germany is at a crossroads,” warns fintech expert Wohlfarth. The industry in this country is currently under attack, and there is great frustration among companies.
“If we don’t step up investments in the first half of the new year, Germany’s heyday as a location for innovation will be over,” emphasizes Wohlfahrt.
The difficult situation of the young financial companies is mainly due to the complex macroeconomic situation: The Ukraine war, the high inflation and the turnaround in interest rates have been putting fintechs under strong pressure for months. In 2022, companies were therefore also increasingly reporting changes in strategy – with the aim of becoming profitable more quickly.
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“More than ever, companies have to prove that their business model is economically sustainable,” says Christian Nagel from the venture capital firm Earlybird.
Investments in the second half of the year at a three-year low
Because venture capitalists are much more cautious in this market environment – fintechs have to fight for their next round of financing. This is shown by current figures from the analysis company Barkow Consulting and Comdirect: In the second half of last year, venture capital investors invested 659 million euros in just 25 financing rounds.
For comparison: In the same half of the previous year, the local fintechs were able to collect around 2.63 billion euros from venture capitalists in 85 financing rounds. A new record.
And compared to previous years, the interest of investors has decreased significantly. German fintechs were able to collect almost 850 million euros in the second half of 2019, and 706 million euros in 2020.
According to Wohlfarth, the problem is clear: “Germany is too dependent on foreign financiers.” According to a McKinsey study from last summer, given the growing volatility on the international markets, the continued dependence on foreign investors could lead to potential reputational and financial damage lead to regulatory risks. But not only that: it also means that local companies hardly get any fresh capital in times of crisis like the current one.
>> Read here: A turning point for fintechs: “We need European champions”
That’s why Nagel and Wohlfarth also agree on the outlook for the current year: “2023 will be the year of consolidation.” Money is becoming even tighter for numerous fintechs, because many of them only just got through the crisis year 2022. That is why there will also be more bankruptcies, according to the experts.
B2C business models under pressure
Investor Nagel sees B2C business models (“Business to Consumer”) in particular under pressure in the new year. This group also includes neobanks like N26 or neobrokers like Trade Republic. These companies address end customers directly and need as many of them as possible in order to achieve positive economies of scale. But for that they have to spend a lot of money on customer acquisition and marketing. Money that is difficult to obtain in these times.
N26 also has to deal with growth restrictions imposed by the German financial regulator Bafin. Bafin believes that N26 has grown too rapidly for many years and has not evolved its processes and controls accordingly. Since the end of 2021, the bank has been allowed to grow by a maximum of 50,000 customers per month.
Meanwhile, Trade Republic is trying to attract more customers with a new interest rate offer. So far, the Berlin neo-broker has focused entirely on trading in shares or ETFs, for example. However, the company is currently feeling the effects of the changed market environment.
While neobrokers benefited from the trading hype triggered by Corona in 2020 and 2021, investor behavior changed last year with the stock market collapse. According to Trade Republic, the savings plan business continues to grow, but the trading volumes of shares have declined.
Now the company has expanded its range and is also promoting customer deposits. Since last week, the Neobroker has been offering two percent annual interest on customers’ money balances. According to the comparison portal Verivox, this offer from Trade Republic is one of the top conditions on the German market.
Infrastructure fintechs in demand in 2023
In contrast, the situation for pure infrastructure providers will be more relaxed in 2023; according to the fintech experts, they will continue to be in demand. These include the Berlin fintech Mambu, which offers other companies banking software. “This business model is relatively independent of possibly rising interest rates or an impending recession,” says Wohlfarth, explaining the relative optimism for this group of fintechs.
Lars Hornuf, Professor of Financial Services at the University of Bremen, also sees continued high demand for contactless payment. “The hype will continue in this segment,” he predicts. This is already shown by the German-British payment service provider Sumup. Despite the crisis, Sumup was able to collect 590 million euros in loans and equity from investors in June last year and, according to its own statements, increase its valuation to eight billion euros.
>> Read here: “It’s very, very hard for many” – The new fintech reality
Many experts had originally expected a wave of consolidation last year. But only a few takeovers are recorded here. For example, the Berlin fintech Penta was sold to the French competitor Qonto in July of this year, as was the Berlin fintech Kontist to the Danish Ageras Group.
For venture capital firms like Earlybird, the current environment means they need to review and, if necessary, adjust valuations. This applies to all companies whose last round of financing was at least twelve months ago, according to Nagel.
Fintech location is threatened with another setback
In view of the negative developments in the German fintech market and significantly lower investments from foreign investors, Wohlfarth calls on German industry and German banks to “wake up and invest”.
“In the crisis, we tend to withdraw and wait and see in this country. But we can’t afford that,” she says. Because then Germany would be overtaken as a location by countries like France, the Netherlands or even Scandinavian countries. Many European countries already have a higher number of new company foundations than Germany.
Wohlfarth’s appeal: “Despite the record year 2021: It wasn’t all just a bubble.” German fintechs offer a lot of potential and could advance Germany as a financial location.
In fact, fintechs are already having a strong impact on the financial services market, many of them counting millions of customers. The financial start-ups posed a permanent challenge and demonstrated what a “first-class customer experience and lean banking processes” look like, according to the McKinsey study.
Nagel also continues to see “great potential for disruption” in the financial sector. For many companies, the prices for financial services are too high and the services that end customers receive are too weak. “Fintechs can address these problems,” says the investor.
The importance of fintechs in Germany in the future will also be decisive this year.
More: “High time to act” – German fintech landscape is losing touch with the competition