Location, location, location: What Germany is getting right in supporting its fintechs

In a networked economy, the German model of building strong economic infrastructure in each federal state, instead of centralizing institutions in one city, like Paris or London, is proving to be very valuable. Today, we can see the benefits of Germany’s decentralized structure and regional economic policy, for instance on the emerging fintech landscape.

I’d like to share with you the reasons I’m hopeful about the German model for supporting fintechs. But before I do so, I want to explain where I’m coming from. I am rooted in the traditional “old economy” banking sector, and I also have experience working with startups, for instance in developing new banking models. Over the years, I was lucky to be involved in and observe many developments, from early online banking and portal strategies to the great ideas behind today’s fintechs.

There’s been a lot to watch and create.

Just recently, comdirect put out a survey that said 793 fintechs are now operating in Germany and have attracted venture capital investments of about 3 billion euros since 2012, including 778 million euros invested during the first nine months of 2018.

For me, this is a number to be proud of. Germany has created a decentralized fintech landscape that is thriving. I like to call it the 4.0 version of our old decentralized banking economy, which once included 13 regional Landesbanken, or public sector wholesale banks, with total assets of 1.7 trillion euros. (The number of public-sector Landesbanken will be down to six – with assets of about 0.9 trillion euros – by the end of 2018.) In this 4.0 incarnation, Munich-based digital payments provider Wirecard, founded in 1999, has replaced Commerzbank, founded in 1870, as a member of Germany’s bluechip DAX 30 index. Today, the market value of Wirecard equals the value of Deutsche Bank.

Networked, decentral, and in competition with one another

But this time there’s a crucial difference to the impact of decentralization.

Instead of hindering consolidation and impeding “national banking champions,” decentralization in a fintech world promotes innovation, and it actually creates important competition and synergies among regional hubs. Think of Germany’s hubs in Berlin, Hamburg, Munich, Duesseldorf and Frankfurt as one strong competitor to fintech in the centralized capitals of London and Paris.

Just look at the numbers. Two examples for third-round financing of “maturing” fintech leaders in Germany are:

• Berlin-based N26 (a fully licensed mobile bank), which secured an investment of 143 million euros in March 2018, the highest amount of venture capital financing for a German fintech to date
• Hamburg-based Deposit Solutions, an open banking platform for retail deposits, which received financing of 88 million euros in August 2018.

These two companies are considered among Germany’s most valuable fintech startups.

The German fintech landscape

Let’s take a closer look at the German fintech landscape.

Today, about two-thirds of all German fintechs are located in Berlin, Hamburg, Munich or Frankfurt. Almost 90 percent of venture capital invested in 2017 and 2018 was invested into companies in these locations. Within this group, Berlin is the undisputed leader with about 250 fintechs today. Meanwhile, Munich and Frankfurt are home to about 100 fintechs each.

Incidentally, in mid-October, we supported Hamburg Fintech Week, which attracted developers, media, bank representatives and consultants who wanted to hear from leading Hamburg-based fintechs, including Deposit Solutions, Exporo, finanzcheck.de and FIGO.

Looking back at 2017 and 2018, it has been two busy and exciting years for the fintech scene. In July 2018, Hamburg-based finanzcheck.de, an online broker of retail credit, was bought by Munich-based strategic investor Scout24 for 285 million euros. In Munich, Scalable Capital, a digital investment manager, attracted Blackrock as an investor and received second-round financing of 30 million euros.

Another fan of Frankfurt

Even as I argue for the logic of Germany’s decentralized fintech landscape, I do have my own opinion on which location will lead as a European financial center.

Although Berlin is the clear leader in attracting fintechs, and I personally love Hamburg because I have lived here for 15 years, I must say it seems Frankfurt is lined up to be the big winner in European financial services over the next years.

It is one of the leading German fintech hubs, the traditional “old economy” banking core, the main beneficiary of Brexit (or a Brexit that could have been) and part of the emerging “banking oversight axis,” with Paris as home to the now relocated European Banking Authority EBA, and Frankfurt home to the ECB. It might also just stay home to our German “national banking champion”, a potentially combined Deutsche-Commerzbank.

Many may say that in a world of ubiquitous access, mobile payments and cloud computing, location should not really matter anymore. On the contrary, I say location does matter because the ecosystem that’s important to fintechs, banks and bankers alike is first and foremost a physical one.

Therefore, I keep asking myself: Will Frankfurt – the village with 750,000 people – be the big winner here?

My vote is yes.