Unlocking the German FinTech Market
During the Summer of 2022, we explored the German FinTech market with the beloved Payment and Banking Blog in Germany. We have released three articles identifying the German cultural and financial patterns, common German FinTech market expansion mistakes, and proven methods for entering the German market.
We will combine all these articles below for ease of access.
Part I: German financial patterns and consumer culture
Why Expand into Germany?
Germany has been one of the driving forces of the European Union and is seemingly becoming a hotspot for European entrepreneurship. The country’s economic stability, willingness to embrace post-pandemic digital technologies, financial growth projections, and the steady influx of foreign talent are solid arguments to enter the German market. However, sprawling, bureaucratic requirements may deter potential newcomers.
According to Destatis, 22.3m of the 83,2m population in Germany has a migrant background. In other words, one in four people carries a different cultural DNA. Considering the German coalition’s qualified foreign labor goals and the lowered visa barriers for tech workers, it might be accurate to expect an inflow of foreign entrepreneurs and corporations to address the needs of the growing immigrant crowds and locals. After all, Germany is seen as one of the top countries in the world for entrepreneurship.
An influx of foreign entrepreneurs and companies is therefore likely, especially as the German market enjoys a high international reputation1. In addition, Germany’s importance for the European financial industry has increased significantly after Brexit and the country plays an important role for FinTechs and the achievement of their ambitious growth targets.
As per the 2022 edition of “Start-up Heatmap Europe,” Berlin has been voted as the number one start-up destination for the second year in a row, and more than every third founder in Europe could imagine starting their company in the German capital.
As most start-ups have just one shot at making a good impression, entrepreneurs must understand the local dynamics and expectations before starting a business or expanding into the German market. Are you one of these foreign players founding a FinTech start-up or a financial institution in Germany? Or are you a first-time German entrepreneur trying to decode the expectations of German consumers or partner banks? Then your wait is over; let’s quickly scan the cultural DNA of German consumers and the German working culture to ease the business integration process.
German Customer and Working Culture and its Impact on Financial Services
Trust, Trust, and More Trust
If we say that trust is essential in German culture, it would be an understatement. Building a trust-based relationship takes time and effort, but once you create a local customer base, you might count on these customers to stay with you through thick and thin. Of course, most FinTech start-ups rely on the good old “word of mouth” when building trust. Still, we usually advise starting by collecting local stamps of approvals through local certifications, TÜV, Stiftung Warentest approvals, and other applicable references, which will establish more substantial confidence in your brand.
Cash as a Data Protection Mechanism
Finally, cash payments are losing their momentum after the pandemic. Regardless, paying in cash still comes as second nature to some (72% in 2022, according to Statista) German customers. In addition to historical reasons and the lack of alternatives some merchants offer, this habit comes from the instinct to protect financial data. Data privacy is no joke in Germany, and the lack of a proper data protection mechanism (or the lack of explanation thereof) could be a deal breaker for some customers. That’s why newcomers, particularly FinTechs and banks expanding into Germany, should explain the terms of data processing and storage and whether the data is being shared with foreign sister companies (the answer is no).
German Borrowing Behavior
I had a credit card with a decent overdraft limit when I was just a freshman at university. Most US-born colleagues spend their 30s and 40s paying back student debts to brand-name schools, whereas some expats you see on social media with great financial advice finance their designer clothes using POS finance or consumer loans. In Germany, the approach is quite different. Credit cards are rather niche products due to the local culture, and consumers are not used to resorting to consumer credits as quickly as other Europeans.
Even the German word for “debt (Schuld)” is the same as the word “guilt,” which should give an idea about the way debt is perceived. Hence, there is a low adoption of the first generation of (p2p and consumer) lending products in Germany.
The same applies to mortgage products, as homeownership in Germany is lower than in most other developed countries.
The increasing interest rates are additionally likely to slow down the real estate boom of the past years.TL; DR: define strict personas before enabling consumer lending services or features.
Saving-as-an-Investment
German consumers may be risk-averse, but the investment patterns have definitely started being more adventurous in the post-pandemic era. Traditionally, low-risk and saving products have been Germany’s most popular investment-related products. However, the post-pandemic digital wealth management trends, low interest rates (although now changing), and the inflation protection instinct seem to have triggered WealthTech curiosity. For example, as of April 2020, the German neobroker Trade Republic had 150,000 users, consisting of more than one-third of first-time investors. Now, the mobile broker has more than 1m users.
Another example underlines the interest in alternative investment methods: According to Gemini’s “2022 – Global State of Crypto” report, 17% of Germans own cryptocurrencies, and 53% of Germans are “crypto-curious”. At first glance, this may not sound particularly impressive, but smartphone payments have an acceptance rate of only 18%.
Conscious Consumers
German customers are very sensible and perform a lot of research and comparison before a purchase (or subscribe) decision. All newcomer FinServ players are advised to pay extra attention to their FAQs, customer service, and customer-facing documentation. Also, explaining your services and USPs in a simplified manner on comparison portals could give your company a nudge.
Practicality Above Bling-Bling
German consumers are modest and practical, so status-driven products and services are only on the radar for smaller crowds like non-Germans or HNWI. Quality is important, but before investing in over-the-top features or services (that customers won’t be willing to pay for), it is advised to check whether there is any interest. Also, longevity and economic advantages can give products and services a competitive edge.
Innovation Comes Second
or financial institutions and corporations, regulatory compliance is way more important than innovation. As corporates and banks pay the utmost importance to keep their licenses, authorizations, and reputation intact, they would want the newcomer provider or partner (you) to pass the compliance test with flying colors.
As for consumers, in addition to compliance, ease of usability is a big plus. According to the Association of German Banks’ survey dated February 2022, 78% of consumers prefer banking app usability over different functions and services. The message is clear: do one thing, but do it correctly (and compliant!).
Meticulous Work Culture
Both B2B, B2C, and B2G customer segments are part of a diligent work culture. That means newcomers must give their counterparties time to deal with the procedures and digest the offer and the changes to the status quo. Also, some processes might be slower than usual. (e.g., a house sale takes months, or company formation takes weeks as opposed to hours, like in some countries). Therefore, your sales team might want to leave the haggling methodology at home, focusing on building long-term relationships, trust, and diligent processes.
You might ask yourself why your team should lose time with integration and localization instead of entering the market immediately. However, remember that integration is a crucial element of German culture. As there is an instinct to conserve the local market and competition, you are golden once you are used and beloved as a local brand. And as the German market success and regulatory approval is a genuine stamp of approval, once you are accepted in Germany, there won’t be anything between your brand and the European market dominance.
1 Germany is ranked #2 in entrepreneurship globally, according to US News & World Report, BAV Group, VMLY&R, and The Wharton School of the University of Pennsylvania (2021); as the 6th most startup-friendly country according to ceoworld.biz (2021).
2 Reference: Bankenverband (Association of German Banks), Mobile Banking und Mobiles Bezahlen 2022
Part II: 5 Mistakes to Avoid When Entering the German FinTech Market
In Part I, we explored the German financial patterns & consumer culture and revealed the local difference in terms of thinking and financial management.
Regardless of the domestic learnings and success stories your company might have, clocks reset to zero the moment your company decides to enter the German market. Like all markets, the biggest economy in the EU has unique challenges and opportunities and must be studied carefully before a market entry. Unfortunately, since many corporations and ventures do not do their homework sufficiently before entering the market, we see only a tiny fraction of foreign FinTechs and banks capturing the market’s attention.
So, how to avoid throwing the German market project in the bin? Let’s take a look at the five common mistakes we have been observing as starters:
1. Assuming that you can transfer your business to Germany, „Einfach so“:
All markets are different and require prior research, preparation, and strategizing. But sometimes, entrepreneurs do not want to invest time in the preparation phase to gain time due to limited budget or overconfidence, which usually turns out to be an oversight. The projects that start with the „Let’s enter this market and see how it goes“ usually end in the start-up graveyard. After all, domestic success is not proof of future success, and assuming that you can transfer your business precisely as it is in the domestic market can cost you, especially in the financial markets. Even if there is a market gap or demand for the planned product, business operations could work differently in Germany.
Your branding might not work well or have wrong affiliations you are unaware of. You might encounter cultural barriers, or the habits you want to change might feel good for consumers. When imagining hundreds of potential scenarios, a quick reality check can save you from a costly lesson in market research. In the end, your first interaction with your customers in the new market will be the most important for building your brand awareness. You shouldn’t base this moment on assumptions, market whispers, or copycat models and strategies.
2. Not having a local management team or making decisions abroad:
Companies that would like to grow with their core team, even in foreign markets, demonstrate employer loyalty. However, all markets have their dynamics, and trusting your operations with a team that isn’t experienced in the new market can put you on the back foot. We see a good number of foreign corporations book a ticket to Germany for their top executives, who have never even been to Germany and expect wonders back at home. Your domestic A-team might have succeeded in your home market but will likely struggle in the new market without prior know-how and network. Even if they are quick learners, they will still lose precious operational time while trying to understand the local dynamics and making mistakes.
Instead of sending domestic executives to mission impossible, you can entrust locals (interim managers, consultants, or outsourcing parties) to kick off the operations and help with the integration until you complete the local team. A similar principle applies to decision-making. Due to the difference in market dynamics, the expansion and country managers should be in the front and not in the back seat when exploring new market opportunities. However, most foreign Fintechs and banks rely on decisions made abroad by board members who do not know the territory. As long as the market managers have no autonomy, forcing them to be directed by a team or a board sitting in another country will create unnecessary layers, hinder innovation cycles, and potentially create a conflict of interest.
3. Relying on translations instead of original copy and marketing material:
Sometimes, we see an ad or a billboard and ask ourselves what we just read. This result is very typical for direct translation copies. Although it might feel convenient to translate a message that worked before for another market, relying on translated marketing and sales materials would be a mistake. The appeal of translated copy declines further when describing the particularities of financial products in a rule-based language like German. For local integration, companies should use copy and content writers who think like locals. Alas, we see many start-ups rely on translations for cost-cutting reasons or because they don’t have a local workforce. Since German culture strongly emphasizes „preservation,“ Germans are sensitive about their language and do not enjoy non-native or sloppy copy patterns.
Such an approach could even impact the brand’s trust and professionalism perception. Language sensitivity should also be observed when switching from another German-speaking country like Austria or Switzerland to Germany (or vice versa) as there are differences in dialects and vocabularies. Regional service providers should additionally aspire to fulfill the local language and cultural expectations (e.g., for customers from Saxony, Bavaria, or Berlin) to create a bond with the local culture.
4. Not investing in a thorough regulatory analysis:
As mentioned in the first article of our series, regulatory compliance belongs to Fintech 101 in Germany. Although Germany is a part of the European passporting scheme, which makes expansion from and to Germany more accessible, not all FinTech services fall under the cross-border service scope. Therefore, founders expanding to Germany with the „standardized European regulation“ dream usually feel demotivated by the unexpected turn of events, sometimes to the extent that they decide to close the shop.
Even under the cross-border service scheme, service providers might need further authorizations or comply with additional (consumer protection, data privacy, etc.) regulations, which might impact daily product operations. Also, it should be kept in mind that having approval in another European country doesn’t guarantee authorization in Germany. Regulators have different interpretations, approaches, and working styles, especially regarding novel business models. Knowing these nuances can make managing deadlines, processes, and expectations easier.
5. Assuming BaaS cooperation is a walk in the park:
Speaking of regulatory compliance, no one can deny that Banking-as-a-Service and embedded banking providers have made it easier for entrepreneurs to test and launch ideas without regulatory hassles. Germany has a lot to offer regarding white-label banking, payment, and crypto services, and some market participants are even en route to becoming household names. Although these providers‘ primary purpose is to enable other businesses and create revenue, assuming they are not selective is one of the biggest mistakes foreign Fintechs make. BaaS companies are somewhat „loaning“ their BaFin licenses, so the license should be considered their most vital asset, explaining the protective approach. These providers are selective, diligent, and even demanding to some extent. As an entrepreneur or executive, you should not assume that the BaaS will want to work with you „when they hear about the business opportunity“ and should prepare thoroughly, as if preparing for an audit, before contacting a BaaS. Otherwise, you might not even be able to find a point of contact. Also, getting familiar with these providers‘ services and prices would be helpful when building a local business case.
Part III: How to navigate a successful German expansion?
In our “Unlocking the German Fintech Market Potential” series, we continue exploring the business potential of the German FinTech and digital finance ecosystem for foreign start-ups and banks.
According to Deutscher Startup Monitor, there were over 2k start-ups in Germany last year. Although the number of FinTech start-ups changes depending on the source[1]definition of FinTech, there currently seems to be around 1k FinTech start-ups in Germany. That means one thing: every second or third start-up in Germany is planned as a FinTech, and the competition is fierce.
So how can entrepreneurs navigate success in such a crowded, competitive ecosystem? So far, we have explored the German financial patterns & consumer culture and the 5 mistakes to avoid when entering the German FinTech market. Our series’s third and last article will outline the questions that need to be asked before the German expansion and wrap up with some practical expansion tips.
Three Critical Questions to Ask Before the German Expansion
There are three critical questions to answer before moving to Germany, and they are not necessarily FinTech-specific.
“Why are we moving our services to Germany?”
It might be tempting to relocate to or grow towards one of the biggest economies in Europe. This is especially true
if the business has no more place to grow in its home market,
if the business originates from another German-speaking country, or
if the business has close ties to the substantial minority communities in Germany (e.g., Turkish, Arabic, Russian, or Greek communities).
However, these are not the reasons alone for relocating or expanding to Germany. These communities can have a different need base than you imagined or might be too small to base a business case on (e.g., “bank account for Arabic migrants or business lending for immigrant entrepreneurs). If you don’t already have a specific answer to this question, you should find a vital touch point in Germany to start from.
“Do we have any touchpoints in Germany?”
When relocating or expanding (to any country, really), start-ups and businesses should ask whether the target country promises a customer base, talents, a vivid ecosystem, or a market gap. These touchpoints should also be evaluated with the language, cultural, and digital adoption barriers in mind. The lack of a competitor can mean a market gap or a lack of market need or proper infrastructure. If none of these touchpoints exist (as backed by user and market research), it makes sense to take a step back and re-evaluate the expansion decision.
“Do we have enough budget to survive in Germany?”
Once the answers to the first two questions are set, businesses should evaluate whether they can survive the next 6-12 months in Germany following the expansion, considering the set-up costs, tax implications, logistic and HR costs, and other operational expenses. Start-ups should look into potential funding sources and VC opportunities and assess whether there are any strategic or financial investors they want to be close to in the target country.
Five Tips for Successful Integration in Germany
In addition to preparing for the critical questions and avoiding common mistakes, foreign FinTechs and banks can have a smoother integration (and might encounter less resistance) with the help of the following tips:
Localization via IBANs and T&Cs:
We have earlier stressed the importance of localization and its impact on trust (your most important ingredient for financial services). Although a significant portion of localization depends on language/communication and local management, that’s not all there is. Repeated experience in the German market shows that German consumers are likely to trust correspondence addresses and IBANs. Therefore, foreign IBANs can become a competitive disadvantage for consumer FinTechs, depending on the target audience.
Local Partners vs. Foreign Partners:
Similar to the IBAN topic, the choice of partner might significantly impact the expansion project’s success. Potential customers will likely look at the BaaS and other technical partners and judge the business accordingly. Depending on the product and the financial touchpoint, using a non-German BaaS partner or getting a banking license from a different member state might raise questions. For licensing processes, sometimes building trust using an Estonian or Luxembourg-based license or entity might result in a longer trust-building process. As for the partners, since consumers will have a direct relationship with these providers (through bank communication, T&Cs, statements, etc.), using recognized names might decrease the number of battles you need to fight.
Utilizing the Power of the German FinTech Ecosystem:
Building a network is essential in any innovative business to share experiences and grow the ecosystem. However, in the FinTech ecosystem, being a part of a relevant group can be crucial for lobbying or for overcoming unclarities when regulations are not so clear. In Germany, start-ups can join different associations for horizontal and vertical networking. For instance, the Association of Federal Banks accepts FinTechs as extraordinary members, allowing them to mingle with banks and financial institutions. Bitkom and the Berlin Group also welcome eligible members. Additionally, the Financial Ministry has FinTech advisory and regulatory discussion groups. Even if you do not qualify for a membership, you can alert them of your coming, keep in touch, and prepare for the future. Remember that such connections are likely to serve as a stamp of approval for your business. As an alternative, joining one of the start-up associations, such as the Startupverband, can help with cross-networking.
Plan Long Term:
As we have already talked about the meticulous and detail-oriented German culture, it only makes sense to align for better integration. Businesses should make long-term plans regarding their product, operations, and regulation strategies, as German customers expect them to do. Waiting until the launch date to look into the applicable employment laws, checking a trademark’s availability, or submitting the tax declaration last minute can impact the reputation since „word gets around.“ As can be observed by the rapid rise and fall of instant delivery platforms due to the alleged employment law violations and devaluation, an innovative idea can be good. Still, a legal and ethical idea is much better.
Small Things Matter (Still):
Last but not least, small things matter and are appreciated, also in Germany. Although corporate gifts and extravaganza are not a big part of the German culture and are not expected from financial service players, your partners and customers would always appreciate a well-thought-out holiday card or Advent calendar during Christmas. Try to buy a desk calendar with German state and country-wide holidays after arriving in Germany, marking off days and ensuring not to bombard leads with e-mail during Pfingsten.
[1] According to the Startup Monitor of the Startup Verband, there were +700 FinTech startups in Germany in 2021. Payment and Banking mark this threshold with 1056 German FinTech startups.
Links to the original Payment and Banking articles in English and German can be found below:
Part I: German financial patterns and consumer culture
https://paymentandbanking.com/en/part-1-german-financial-patterns-and-consumer-culture/🇩🇪Die Besonderheiten deutscher Konsumenten und Organisationen: https://paymentandbanking.com/teil-1-die-besonderheiten-deutscher-konsumenten-und-organisationen/
Part II: 5 Mistakes to Avoid When Entering the German FinTech Market
https://paymentandbanking.com/part-ii-5-mistakes-to-avoid-when-entering-the-german-fintech-market/🇩🇪” 5 Fehler, die es beim Eintritt in den Fintech-Markt in Deutschland zu vermeiden gilt“ https://paymentandbanking.com/5-fehler-die-es-beim-eintritt-in-den-fintech-markt-in-deutschland-zu-vermeiden-gilt/
Part III: How to navigate a successful German expansion? https://paymentandbanking.com/how-to-navigate-a-successful-german-expansion/
🇩🇪 So gelingt es, erfolgreich in den deutschen Fintech-Markt zu expandieren: https://paymentandbanking.com/so-gelingt-es-erfolgreich-in-den-deutschen-fintech-markt-zu-expandieren/
If you need a hand with taking the first steps to the German FinTech ecosystem or need a quick clarification, contact us, and we will be happy to play a role in your success story.