Fintech Disruption

Germany’s Banks Wake Up to Tech Innovation

Computer hardware Source: Bloomberg
Computer hardware
  • Why it matters

    Why it matters

    As German banks stop being afraid of tech and start to embrace it, they might yet get on track with modern industry practices. But are they still a day late and a euro short?

  • Facts


    • Goldman Sachs estimates that new business levied by financial technology firms could see $4.7 trillion in revenue and gains of $470 million in the next year.
    • 80 percent of start-ups that UBS collaborates with don’t survive into full-fledged businesses.
    • In 2014 the U.S. invested almost $10 billion into financial technology, whereas in Germany that amount was just 85 million.
  • Audio


  • Pdf

For a very long time German banks ignored the boom of emerging new competitors from the Internet. But now hardly a day passes without a credit institution entering into a new partnership, or new investment with one of the so-called FinTech, or financial technology, companies.

“2015 was the year of awakening for German banks,” says Peter Barkow, the founder of the management consultancy of the same name.

It was a paradigm shift that seemed sorely needed. These collaborations could prove crucial for the survival of banks. New ideas are everywhere in the world of finance. There are new services that simplify banking transactions. There are alternative sources of finance for companies and individuals. There is technology to replace bank tellers. In short, the entire value chain of financial institutions is in flux. The U.S. investment bank Goldman Sachs believes that the new competitors are set to challenge more established companies to the tune of $4.7 trillion in revenue and gains of $470 million over the next few years.

In 2014, the U.S. saw almost $10 billion invested in financial technology. In Germany, it was just €85 million.

But financial technology firms are not only a threat to banks – but a growth opportunity. Andreas Dombret, a board member of Germany’s Central Bank gently told the country’s banks to buck up their ideas, pointing out that digitization brings “many opportunities.”

Message received, apparently. Commerzbank has been involved in several financial technology firms, Deutsche Bank opened three Innovation Labs this quarter, Hypo-Vereinsbank organized an “App-a-thon” with its Italian parent Unicredit, bringing in young developers to create new banking applications. Even small institutions are getting involved. Volksbank Hellweg is cooperating with Lendstar to develop an app that allows friends to send, share and lend money.

The German market is lagging behind in this sector. In 2014, the U.S. saw almost $10 billion invested in financial technology. In Germany, it was just 85 million, according to data from the consultant firm Accenture and Deutsche Bank. But at least 56 percent of German financial institutions cooperate with financial technology companies, according to a survey of IT service provider GFT in the spring. Yet these market disruptors aren’t causing profit erosion. Most of the competition is seen in payments, for example, Paypal, which created an alternative to banking payment systems. The German financial sector came late to that party with its own competitor, Paydirekt.

Innovation such as Paydirekt is one of four possible strategies with which banks can respond to financial technology companies. Spinning off innovative departments or investment in or cooperation with these firms are also possible. Or a mix of all these approaches. Commerzbank’s subsidiary Comdirect, for example, cooperates with seven financial technology companies – but also occasionally builds a solution for itself such as its online-only accounts. “Sometimes we can create a proprietary format, sometimes it is more important to be first in the market,” says Comdirect Chief Executive Arno Walter.

Only a few institutions take a properly sophisticated approach. By far the most active is Commerzbank. It has so far engaged eight financial technology companies through its funding units Main Incubator and CommerzVentures. This year alone it added six investments. For the second largest German bank, the investments are an important part of its strategy. “Main Incubator and CommerzVentures are our scouts in the fintech world,” said Bettina Orlopp, strategy chief at Commerzbank.

The Sparkassen Group in turn is involved with four companies. But overall, major German banks and financial associations have been slow to engage with FinTech. The management consultancy group Barkow said in a recent report that “The German banking sector as a whole has less invested in such start-ups than Goldman Sachs or Citi alone.”  Citi and Goldman Sachs are involved with 24 young start-ups each.

It would be sensible to diversify investments, as many of the start-ups are likely to ultimately fail. “Eighty percent of the developments that we operate with on start-ups will not work out,” says UBS Chairman Axel Weber. But if only a small number are successful, that can still help UBS tremendously.

But not all banks are convinced that direct investments are the way forward. Deutsche Bank said it prefers to cooperate with FinTechs, rather than buy them, as it believes that is the best way to preserve the creativity and entrepreneurial spirit of start-ups.

The UniCredit subsidiary HypoVereinsbank (HVB) also sees financial technology firms primarily as potential cooperation partners, although it does not rule out more involvement. Instead of investing in financial technology, HVB invited coders, programers and web designers as part of group-wide “App-a-thons” in Munich, Milan and Vienna, where they presented their ideas based on 20 questions and developed apps over a 24-hour period.

Deutsche Bank takes a different approach. It has plans for three innovation centers in Berlin, London and California’s Silicon Valley where financial technology companies and academic institutions can share and exchange technical solutions. Comdirect launched an incubator, where very early start-ups might receive infrastructure and small capital injections.

Brett King, the Australian creator of the digital bank Moven, believes that major banks that aren’t innovating in the direction of financial technology are doomed. He points out the example of HSBC. It is far behind its competitors such as BBVA or Deutsche Bank.  HSBC has been busy producing growth through new branches and new products, but this strategy no longer works.

In fact, collaborations are now a key part of many established financial institutions. And the young challengers are open for cooperation. “I’m not a fan of every man for himself. FinTechs and banks can complement each other well,” said Chris Bartz, chief marketing officer at Finleap, a FinTech firm. “Established players have problems with innovation processes and FinTechs bring banks these innovations. On the other hand, the banks understand much of the regulatory framework.”

But the pace of the German financial giants is not convincing everyone. “So far the banks have responded clumsily to the challenge of Internet companies like Google and Apple or FinTechs,” said Mark Roach, the Ver.di union official responsible for the banking industry.

One area where banks can definitely do more is in big data. Banks only timidly use their greatest treasure of millions of customers’ data. Deutsche Bank has plans to be more active there “if the regulator provides the framework and the customers choose which services they want from us,” a spokesman said.

Deutsche Bank wants to introduce a financial planner service. Through its broker service Max Blue, customers could see the most traded securities. “In the future, we could show the customer what people with a similar investment horizon just bought and sold,” said the spokesman.

So far, the banks are concentrating their commitment to the kind of innovations that most customers would notice immediately: “With everything that has to do with interfacing with customers, we experiment with innovative approaches as soon as they’re available to bring them to the customer,” said Ms. Orlopp of Commerzbank. “The second level involves bank processes, which must become more efficient through innovation.”

There are many models of these innovations – in other countries. There are many banks that have long employed the “block chain” technique, the technology behind the cryptocurrency Bitcoin. With block chain, transactions can be secure and considerably cheaper. Almost all important international banks have launched programs that explore block chain opportunities.

So far, financial institutions have been able to afford a certain hesitancy. Although financial technology is disrupting the industry in many ways, traditional banks are a long way from redundant. “Banks will not be superfluous,” says GFT expert Bernd-Josef Kohl. “For certain business FinTechs need a banking license. But as soon as they acquire a banking license, tougher regulations then apply. Large fintechs have had trouble with this.”

The example of Fürstengrotte all but proved Kohl’s point. The participation platform was one of the few financial technology companies in 2014 to acquire a German banking license. After a few months Fürstengrotte gave it up – voluntarily. Founder Guido Sandler complained about the “lack of flexibility” that regulations forced upon him. “We can not play dinosaurs if everyone else is a speedboat,” he said.


Yasmin Osman is part of Handelsblatt’s covers the banking industry from Frankfurt. Elisabeth Atzler is Handelsblatt’s banking correspondent. To contact the authors:

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!