Fintech Innovation in Europe: How Startups are Disrupting the Banking Sector

This is a guest post by Kilian Thalhammer, Robin Dechant, and Philipp Bahnhardt at Pearlscout, a business advisory firm in Germany. Digitalization and emerging technologies are known to disrupt many industry sectors. Yet, due to regulations and a complex legal environment a similar fate was delayed for the financial industry. This is finally changing as today we witness many young companies targeting the financial sector and banks are advised to pay careful attention to this trend. Financial institutions, not only in the US, but also in Europe face increased competition from many startups, whose speed and agility in development cycles are unmatched. This poses a great challenge for banks to innovate. As an example several major German banks recently announced their intention to develop their own mobile wallet applications by the end of 2015 (amusingly, PayPal® and other web companies have been offering such services for more than a decade). The unbundling of the banks is a vertical phenomenon where startups are targeting one or two specific services of traditional banks such as loans, trading or mobile payments. This provides the startups with the ability to offer a superior service at lower costs, all while being 100% customer centric. Think about your friend talking about his experiences with financial services: chances are that he or she will provide positive feedback for the new online services (such as the digital banking experience now offered by Number26, a startup based in Berlin with PayPal founder Peter Thiel amongst its investors), versus experiences made offline. In fact, many of today’s younger generations are very unlikely to set foot into an offline banking branch if they require services, such as lending, savings or investments. Even highly commoditized areas, such as credit scoring or payments, are facing growing digital competition and new players continue to emerge globally. This is a significant threat to banks, not only due to the loss of customers in different areas but much more them not recognizing changing user demands, where users are bypassing the traditional banks. Another big reason for increased competition is the financial crisis, which has made consumers more open to try out alternative services. A big hurdle for fintech entrepreneurs in Europe is the mix of different cultures and differences in technology adaption. Entrepreneurs face difficult decisions in which market to set-up their operations and roll out their products or services. For example, whereas Sweden could soon be the first cashless society, Germans still love their hard and cold cash. On a side-note: this probably adds another reason to a delayed Apple Pay™ launch in Germany. However, this is also a big opportunity for European entrepreneurs versus their US counterparts when entering the European market, as European entrepreneurs naturally are more accustomed to a wide range of cultural differences, thus giving them an advantage in such markets. Generally, a unique characteristic of the fintech industry versus other tech industries is the importance of trust and compliance. To really understand the users, fintech startups have to ensure and maximize trust, especially when targeting older and less tech savvy people. Ironically, these are usually the ones with more cash to spare, versus younger digital natives. One indication of trust is financial data security. To learn how to build a secure financial app, view Yodlee® Interactive’s eBook on Key Security Questions to Ask a Financial Data Aggregation Provider. Another current development in the EU payment market is the new restrictions on the interchange fee, issued by the European Commission. Expect highly interesting and dynamics reactions from banks, retailers and end customers, when the interchange fee for consumer credit cards will be capped at 0.3%. Recent investments in several London based fintech startups, such as TransferWise Inc. or WorldRemit Inc., clearly illustrate venture capital commitment to players disrupting the banking sector. EarlyBird GmbH, a Berlin based venture capital firm, recently published a database for startups in this area. This shows that there are strong beliefs from VCs in startups disrupting the banking sector. With this many new emerging ventures, however, we are likely to experience consolidation in many different areas within the fintech segment. As an example, we currently count more than thirty mobile payment service providers in Germany. Yet, Europe is experiencing the highest global inflow of venture capital in the fintech segment, with an increase of 215% to $1.48 billion in 2014. However, it’s not that those startups will make traditional banks unnecessary; instead, they will seize their profit and the combination of startups will be a substantial threat. We believe this development will continue and are curious what will be accomplished next in the area of digital financial services. Are you an entrepreneur looking to create innovative and engaging financial apps for consumers? Please let us know and check out this eBook on Fintech Innovation: Innovate at the Speed of Technology.