What Lies Ahead for the German Fintech Industry in 2022

When we simply read through the last annual outlook again these days while researching for our annual outlook, we could hardly believe our clairvoyant abilities at first: “Trade Republic could become the new N26”, it said!!! How prescient!!! The very next moment, of course, we had to admit to ourselves: Twelve months ago today, making the “Trade Republic will be a unicorn” prediction – that required about as much know-how as predicting that FC Bayern would once again become German champions. That, on the other hand, let’s say Mambu would mutate into a unicorn? We had nothing in mind. Just as we would never have thought it possible that at the end of this crazy year there would be a total of seven to nine German fintech unicorns (depending on how you count them).

And indeed, if you stop for a moment and take a look at the German fintech industry, as you always do at the end of the year, you’ll think you’re looking at a 14-year-old who has suddenly skipped a few grades and is proudly waving his Abitur. However, life teaches us that not every child prodigy will make it in the adult world. And so a few skeptical notes have crept into our outlook for the year. Five fintech theses for 2022:

More and more founders are looking for the exit

It was six years ago that startup investor Carsten Maschmeyer got carried away with the following prediction: “I am convinced: just as there is a branch death among banks, there will also be a fintech death.” 90% would not survive, was his prediction. An assessment that quite a few market participants shared at the time.

Things have turned out differently. At most, 2-3 handfuls of serious fintech have died in recent years – the large remainder is either alive and kicking or at least more or less alive.

Nevertheless, the great upheaval of the German fintech market has begun. However, differently than expected. The founders are not riding their fintech companies into bankruptcy. They are riding them to an exit. Sure, some deals are of a manageable size (see the sale of the robo advisor Growney to Lloyd Fonds) – and in some, less money flows back than flowed into the companies during the years of development (see the sale of the credit portal Fincompare to the Volksbanken). However: Even in such cases, the amounts involved are in the tens of millions. And other exits are of course much larger or at least more lucrative. See, for example, the KYC specialist WebID or the financial software provider Fintus, both of which were swallowed up by financial investors. Or the sale of Stocard to Klarna. Or the sale of FintecSystems to Tink. In the case of the latter two exits, the calculation of the management and the existing investors was very simple. They gratefully accepted the EUR 110 million and EUR 120 million offered and gave up their independence in return.

There is much to suggest that the trend towards a sell-off could even accelerate in 2022. The sales market has never been better: private equity is lining up, even among competitors there are buyers (see the Finanzcheck takeover by Smava), a player like Klarna is virtually in a buying frenzy, while established strategists like Visa, Mastercard, or Paypal put billions on the table without hesitation if they have to.

The old formula from the payment market – buy or be bought – is spilling over into the rest of the fintech market. Large players such as Scalable Capital and Solarisbank have just made their first acquisitions, and N26 is currently looking for an M&A officer via a job advertisement.

According to information from Finance Forward and Finanz-Szene, several well-known German financial startups are currently discussing a possible sale; in some cases, investment banks have already been mandated. The momentum is there, even where operational business is not really going well.

Surprisingly, German banks have not played a major role in the process so far. Deutsche Bank bought Berlin-based fintech Better Payment for a very manageable sum, and Volksbanken (see above) snapped up Fincompare for 15 million euros. Otherwise, there was not much in the year that is coming to an end.

2. First Unicorn – and now an IPO

It may be that we have lost count. But if not, no less than five German fintech companies have become unicorns this year, namely Trade Republic, Mambu, Solarisbank, RaisinDS, and Scalable Capital (N26 and Wefox were already unicorns before, while SumUp should perhaps be called an “unofficial unicorn” due to its lack of official valuation).

In any case: The year of the big funding rounds should now be followed by the year of the big IPOs. The two big fintech companies with banking licenses, namely Solarisbank and N26, could be the first. Solarisbank has officially announced its IPO for 2022, while the management of its Berlin-based city rival has, at least internally, set its sights on the stock market. If the stock market climate remains stable, he expects several fintech IPOs out of Europe, says Barbod Namini, partner at HV Capital. Many financial startups have reached the necessary maturity, he adds.

What doesn’t necessarily make it easier is that for the important categories, there are global trailblazers that are already listed and whose latest numbers can be stupidly placed next to the prospectus of the contenders. In neobanking Nubank, in neobrokerage Robinhood in crypto Coinbase. Let’s hope that the figures of local IPO candidates do not pale against this background. Defending one’s performance at a roadshow is something different than doing so in front of a benevolent advisory board.

3. Do accounts and cards also work for corporate customers?

In 2021, most of the money again flowed into those fintech companies that manage to directly address millions of end customers. The prime examples in this country are N26 and Trade Republic. In addition, a lot of money also flowed into fintech comapnies that offer the typical neobanking products (namely account and card) not for retail customers, but for the self-employed, commercial enterprises, or SMEs.

It is surprising that the investor money is spread over a comparatively large number of players. Because admittedly …

Kontist (account and tax solutions for freelancers) has a different target group and a different approach than Penta (banking services for limited liability companies), …
… Moss (corporate credit cards) addresses a somewhat different clientele than its counterpart Pliant …
… and those who do not come primarily via the card, but rather via spend management such as Spendesk or Pleo, have a different story to tell their investors …
… and yet: In the end, the players mentioned (and others such as Qonto, Payhawk, or Soldo) are at least distantly related to each other and are courting target groups that are at least similar. Are there enough customers for all these fintech companies in the end?

In 2021, the investor money almost flowed by itself. But will it stay that way in 2022? What should give pause for thought in this context is the story that Hinnerk Rott, founder of the failed Berlin fintech Bettercard (a player like Moss, only without funding …) recently told in the FinanceFWD podcast: During the customer acquisition process, some of the approached corporate customers would have reacted almost annoyed. What, another one who wants to sell us a credit card?

4. The crypto hype is just beginning – isn’t it?

No one would have believed you 2-3 years ago: that there would be a multi-billion brokerage fintech (Trade Republic) and a multi-billion crypto trading fintech (Bitpanda) in the DACH region by the end of 2021. Crazy times.

Now, of course, it remains to be seen (see also our banking outlook yesterday) how the Trade Republics and smartbrokers will fare if the stock markets should ever be lame for an extended period of time. However, a lot of the new trading money is not flowing into short-term gambles, but into low-cost (albeit low-margin) ETF savings plans. That speaks for a certain sustainability. What also speaks for Trade Republic and Co. to establish themselves permanently: So far, the neo-brokers have made a living from customers who invest in securities for the first time. In the medium and long term, however, Trade Republic is also targeting customers who have so far been trading via traditional banks or online brokers. This is not the clientele that will leave at the first crash.

On the one hand, crypto trading is more uncertain, but on the other hand, it is also more imaginative. The digital currencies were almost declared dead in the meantime, but they came back – and it is quite possible that they will stay. In any case, our news that the savings banks are working on a crypto wallet has electrified the German financial industry. Two major trends are emerging:

On the one hand, trading with digital currencies could establish itself in the mass market, if not via the savings banks or other traditional banks, then possibly via Paypal. On the other hand, a second generation of crypto companies is starting up with promising approaches – also from Berlin, such as Finoa (custody) or Unstoppable Finance (crypto investment, defi).

5. New fintech cohort must deliver

Has there ever been a better time than 2021 to start a fintech company? Teams with some experience, in particular, have been sheerly showered with money – not only from German angels, but also from top international investors. Newcomers include Mondu or Topi, for example. Both want to bring the payment revolution to the business world. Billie is also on the move there. A lot will happen in this market in the coming year.

Other topics are also at the crossroads: Will the breakthrough succeed or not? Take embedded finance, for example. Will providers from non-financial sectors actually integrate fintech features in the future? For example, a credit card from the delivery service Gorillas? Meanwhile, the female finance startups have to show that they manage to appeal to women with special investment apps. The advance VC money has been transferred, now the fintech companies have to deliver. The bar is high because in the good funding climate, many newcomers have raised money at comparatively high valuations.

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(Featured image by FelixMittermeier via Pixabay)

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First published in finanz-szene.de a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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