FinTech startups are currently on the rise. Long-established giants in the financial industry are now realizing that collaboration with innovative companies is essential if they want to avoid being left behind in the digital transformation. Recently, Wirecard pushed Commerzbank out of the DAX. We spoke with two founders from the FinTech sector about what makes the industry so exciting and what its future holds. Erik Podzuweit is Managing Director of Scalable Capital, Florian Kappert heads the company Bilendo.
What fascinates you about the FinTech-Industry? What are your personal interests in this regard?
Eric: I find it exciting how, after decades of stagnation, big data and machine learning can finally make financial services for private investors better and more affordable. Financial services aren't just about suddenly being able to order a product from the comfort of your own home or navigating the mountains more easily by bike.
Asset management addresses important life issues, such as one's own standard of living in retirement. This is precisely where many people feel permanently guilty about not saving enough money for their retirement. At the same time, they lack the courage or time to take care of the issue themselves. This is where we, as a digital asset manager, can provide real added value.
Florian: The financial and insurance worlds are, and have been, dominated by large, sometimes multinational corporations. Technological developments over the past 30 years have created significant structures and a high degree of complexity. Differing tax and regulatory laws lead to even greater complexity and ultimately to extremely rigid structures. Furthermore, these companies struggle to develop solution-oriented, modern, and scalable tech products.
We FinTechs (or InsurTechs or tech startups in general) have it much easier here, because we are on the green meadow We were able to start working. This allowed us to immediately focus on efficiently solving the prevailing problems. The centralization of all customer requirements (the core of digitalization) is our primary goal, and cutting-edge technology is the means to this end.
The end result is often – of course not always – solutions from startups that make the leap out of the niche and whose approach can enjoy great demand.
This is precisely where I see the greatest challenges, and it's my personal interest. Over the years, we've proven many times that we can develop great tech products. I believe that traditional intermediary services (like almost all financial and insurance products) will be traded in the future without the involvement of a bank or insurance company. The marketplace for this will be demand-oriented platforms that automate the exchange of these services. These solutions have significantly lower transaction costs and, with the right approach, also a better business case.
To what extent has FinTech already changed the financial industry and what changes lie ahead?
Eric: FinTechs have forced a rethink in the banking industry. After all, banks are no longer so powerful that they can afford customer dissatisfaction, customer churn, or the loss of other business areas. But rethinking isn't enough. Banks also have to adapt. They still struggle with this today. They don't want to, and can't, cannibalize themselves within their own companies overnight. With their large branch networks, expensive fund departments, and ancient legacy systems, many banks are simply no longer competitive in the long run.
Florian: The financial industry is in the midst of a transformation. The market is under strain. Market conditions are leading to additional pressure. Customers are being supplied with solutions by other IT giants that far surpass the capabilities of banks in terms of user experience and customer service. In my opinion, however, the major transformations will only occur in the next 10-20 years. Current technologies from research will prevail. It is still completely unclear where and how the new financial service providers' touchpoints with customers will look. Usage behavior and customer demand (B2B and B2C) will certainly change fundamentally. New devices and needs-based offerings will dominate. The question is who can do it best. The best solution will win.
Building trust is certainly the biggest challenge
What challenges do FinTech startups face?
Eric: In my opinion, this cannot be generalized. B2B FinTechs, for example, face entirely different challenges than B2C FinTechs, which primarily have to convince private customers of their ideas. Since the FinTech sector involves people's hard-earned and saved money, building trust is certainly the biggest challenge. We must not squander this trust, even if a wave of consolidation occurs.
FlorianStartups also age, structures emerge, processes are established, and laws apply to new companies just as much. The challenge lies in remaining agile and capable while still offering a product or solution that is modern and technically up-to-date.
“Politics is overwhelmed by developments in the world”
What needs to be done politically so that FinTech can reach its full potential?
Eric: In general, I don't see any major political hurdles for FinTechs. We received our BaFin approval very quickly, and we always felt like we had a very cooperative and innovation-friendly partner at our side.
However, politicians could do something good for investors by introducing higher tax allowances for direct investments in stocks and ETFs. In return, government subsidies for complicated and expensive retirement and insurance products should be abolished. In my opinion, this is a clear perverse incentive for savers. Many private investors think they're doing something worthwhile for their retirement. In reality, they're saving themselves into poverty.
Florian: Nothing. Politics is completely overwhelmed by global developments (including IT). This isn't the fault of politicians in general, but rather the structure and history of politics. Politics, too, is subject to the same demands as corporations. Only, politics functions as it did 20, 30, or perhaps even 2,000 years ago. Structures, agility, and, above all, transaction costs in this system are far too high. Transaction costs here correspond to "the voice of the people," and that hardly makes it into the system efficiently anymore.
The only thing that would really help would be superfast internet everywhere. It's ridiculous that Germany is presenting such a poor picture here.
The relationship between FinTech and the old economy is good
What is the relationship with the "old economy"? How can potential hurdles be overcome and problems addressed together?
Eric: We have a truly good and trusting relationship with our investors and business partners, regardless of whether they come from the old or new economy. We cooperate successfully with Siemens Private Finance and have come to know Erivan Haub as a truly great entrepreneur and investor. We work just as well with Holtzbrinck Ventures, a traditional venture capitalist, together or with BlackRock and ING-DiBa, which merge both worlds.
Florian: The relationship is good, at least most of the time. As mentioned above, the old economy has the problem that it rarely produces good IT products. This is due to the companies' lack of know-how and mindset. The old economy can only achieve the transformation into a new company if all the necessary resources are available. This rarely works because structures are blocked by law and order (e.g., interest groups of all kinds).
The best option is certainly to green meadow However, the problem remains with the know-how or at least the cooperation with a FinTech.
“The Germans’ saving behavior is a real problem”
What do you think are the biggest trends in FinTech right now?
Eric: There will be even more collaborations between FinTechs and banks. Banks have realized that they cannot build the necessary expertise quickly enough or bring digital business ideas to market quickly enough. Therefore, they are increasingly collaborating with FinTechs. We will also experience a market consolidation. Clear market leaders are currently emerging in many FinTech sectors in Germany. This will make financing and thus growth opportunities more difficult for all other FinTechs.
Florian: Misusing the term 'artificial intelligence' for marketing purposes and giving unsuspecting customers a metaphor that explains why the solution is better than the status quo.
How will FinTech change our society?
Eric: Definitely a positive development. First, FinTechs make many traditional banking services more convenient, faster, and cheaper. And the more tedious banking tasks a robot takes over for us, the more time we have for the good things in life. Furthermore, FinTechs are much more transparent than traditional financial institutions. Therefore, we as an industry have the opportunity to restore people's trust in the financial sector. This relationship has not recovered despite the many scandals involving German banks since the financial crisis. And that ultimately harms the entire economy.
As the founder of a digital asset manager, I also want to inspire more people to invest. The Germans' love of low-interest call money and savings accounts is a real problem. With this saving behavior, many people will not be able to maintain their standard of living. On a large scale, however, this also represents a societal challenge that statutory pension insurance can only offset to a certain extent.
Florian: The key word here is consumerization. Everything is becoming more usable, more automated, more user-friendly, more tailored to needs. This gain is expensive, because on the other hand, everything is becoming more expensive, more complex, and more opaque. This will certainly have a major impact on salaries, the skilled labor market, and the economy in general. Very exciting, in any case!
Munich is a top location with one or two problems
How do you assess Munich as a location for FinTechs? What are the advantages, and where is there perhaps still room for improvement?
Eric: The environment is very good for FinTechs: Munich has two outstanding universities, through which we, as a technology company, can recruit really good people. Furthermore, Munich offers an optimal business environment. We have a Munich investor in Holtzbrinck Ventures, a Munich partner bank in Baader Bank, and an important Munich cooperation partner from the "old economy" in Siemens Private Finance.
Another advantage of the location is the cooperative and innovation-friendly branch of the Bundesbank, which issues bank and financial portfolio manager licenses for Munich-based FinTechs on behalf of BaFin. We were also particularly pleased with the political support. Ilse Aigner supported us from the very beginning. Without her, some important contacts with our current business partners would not have been established, or would have only developed much later.
Florian: Munich is great. There certainly aren't as many startups in Munich as in Berlin. This is a problem, especially for small startups, because you don't meet as many players at events, and the founders don't know each other from school or university.
However, Munich is certainly ideal for any startup planning to collaborate with the finance, insurance, automotive, and IT industries. The salary and cost levels are problematic, but these are also increasing dramatically in Berlin. The labor and housing markets are also problematic. There are several DAX-listed companies in Munich, as well as the German and European headquarters of US IT giants.
Munich remains more of a small town or village. This can be annoying at times, but overall, it's a good place to work. Employees from abroad also like to come to Munich because of its attractive location and the city and surrounding area's many attractions.
Thank you for the interview!
