After the Wirecard Debacle, What Is The Future For German Fintechs?
Fintech is a booming sector in Germany, and the country is one of the leaders of the sector in Europe with 4 companies leading the charge. Far from being a passing trend, with every year the market grows and remains not just viable but thriving. In the financial hubs of Berlin, Munich, Hamburg, and Frankfurt, many fintech startups have entered the market alongside established financial institutions.
As Germany and the rest of the world continue to move away from traditional banking models towards technology-driven financial services, there seems to be no end in sight for the prospering sector. However, other factors in the market are presenting challenges to the fintech environment and how it navigates the future.
The Fintech Sector in Germany
The word fintech is a portmanteau combining financial services and technology, and although the definition is fairly loose it is easy to identify what makes a fintech company. Generally speaking it is any company using technology to deliver financial services, which includes everything from payments to investments to insurance.
The German fintech sector includes both startups and legacy companies. Large, existing financial institutions in Germany were quick to understand the importance of technology and start incorporating it in their services. At the same time, a multitude of German fintech startups have come to market. Many of these have been massively successful.
Large banks have successfully made the move from majority counter banking to digital banking. Startups are focussing on providing different services to what the banks can offer, in particular when it comes to those individuals who may be turned away by established banking institutions. By providing what the big banks cannot or will not, fintech startups represent a truly disruptive force in the market.
The pandemic also fueled a move towards more digital banking in a country that has been reluctant to stop using cash. More German banks are collaborating with smaller fintechs to bring a range of services to their customers. As of April 2020, there were around 700 active fintech companies in the country.
Fintechs And Neobanks in Germany
A specific type of fintech has branched off to become almost a separate category, known as neobanks. These are services that started out as a small fintech providing a limited service and then got so big that they had to become licensed. In Germany the foremost of these is N26, which was founded in Munich in 2013 before receiving €10 million in venture capital in 2015. Today N26 has around 3000 employees and operates in Europe and the United States.
Other more specialized German neobanks include Penta, a business banking solution, and Kontist that targets freelance workers. Neither are yet in the same league as N26, although both have plans to expand beyond the German market.
Scandals And Setbacks
As fintechs have multiplied both in number and in types of services offered, traditional structures of regulation have struggled to keep up. New products come to market faster than the German authorities can identify what supervisory and legal requirements are needed and how they can be adapted to fit new models.
One of the biggest blows to the reputation of German fintech came in 2020 with the collapse of Wirecard. The financial services and payments processing provider was one of Germany’s very first fintech startups, and although thriving had come under scrutiny on many occasions for its choice to work with high-risk clients.
Suspicions of financial irregularities also followed Wirecard from the early days. In 2008 many of these suspicions were laid to rest when respected auditors Ernst & Young cleared the company of wrongdoing. EY continued to work with Wirecard as they expanded globally. When in 2020 it was finally revealed that there was a €1.9 billion hole in the balance books, much of the blame was placed at the door of the Financial Supervisory Authority for turning a blind eye in the face of evidence of fraud.
The investigation into the failings of the regulator and associated authorities is still ongoing, while former Wirecard head Markus Braun remains in custody. The scandal is sure to have a number of repercussions for the German fintech environment, especially regarding licensing and regulation.
Casino Pay N Play Payments Under Review
It is clear that the fintech market in Germany is pulling in a few different directions at the moment. On the one hand, the industry is dynamic and expanding, providing useful and exciting new services to businesses and customers. On the other hand, the ongoing debacle of Wirecard has shaken confidence both in fintech and in the regulators’ ability to properly police the sector.
In the midst of this, Germany is also undergoing a radical overhaul of casino and gambling legislation, and payments are a key aspect of this. Casinos were one of the client bases identified as high risk that Wirecard were criticized for working with, and in the wake of the scandal regulators will be keen to ensure that all casino payments under the new regime are unimpeachable.
Regulated casinos will have the freedom to provide so-called pay n play sites for customers in Germany. These are casinos that require no signup or account, and instead the identity verification service is provided by the payment gateway – Sofort and Trustly being the two most trusted. Players who want to use other payment providers may find that they are limited to using unregulated casino sites, at their own risk. Some payment solutions, like Cash to Code casino payments are still lingering in ambiguity as their status is not clear.
In general the regulator has been cautious when deciding what payment methods can be used at a casino site, so smaller payments fintechs like Payworks, Barzahlen, and Paylax may be excluded from the options for the foreseeable future. There is already a ban on prepaid cards and credit cards, so it may be some years before the gambling regulator considers allowing German fintechs to join the casino payments roster.