The financial services sector in Germany is facing unprecedented change. Startups and other attackers are jostling for their place in the market, backed by new technologies. While across Europe, overall fintech investment more than doubled between 2014 and 2015 (+120%), investments in German fintech ventures grew by a staggering +843% over the same period. Germany overtook Britain as the fintech funding capital of Europe in the second quarter of 2016, with German startups pulling in $186 million (£142 million) compared to $103 million for British businesses. The three largest fintech funding deals in Europe in the second quarter of 2016 were all in Germany: marketplace lender Finanzcheck raised $46 million; digital-only bank N26 raised $40 million; and payment provider AEVI raised $34 million. KPMG and CB Insights say the findings “suggests Germany as a whole is well positioned to attract fintech investors that may be hesitant to invest in the UK post-Brexit.” In Germany, the disruption may jeopardize around a third of all bank revenues over the next few years (McKinsey).

But what makes German fintech tick?

German fintech activities and the development of a fintech ecosystem have started later compared to other global regions. Unlike the United States and the majority of the EU, the fintech ecosystem in Germany is a highly decentralized ecosystem with Berlin, Munich, Hamburg and Frankfurt as independent thriving hubs for fintech innovation and growth.

According to Alexander Hoeltmann, management consultant at Accenture, the driver of fintech evolution in Germany is lack of customer-centricity, speed and agility of traditional banks. According to Hoeltmann, it is because of these factors that fintech firms, therefore, look for singular use cases solutions consequently designed around the customer.

This approach complemented by the independent hubs within Germany have led to a high level of diversification in terms of use cases (please see graph below) with more than 200 fintech firms in Germany.

Ernst and Young have analyzed this fragmented fintech landscape and segmented the fintech ecosystem into 3 regions as outlined by the following graph, with Frankfurt coming in under the latter part of Rhein-Main-Neckar region and Hamburg essentially a part of the Berlin ecosystem.

High internet penetration (89% of Germans between the ages of 25 and 44 use the Internet), increased smartphone-based purchases (25% of Germans claim to have used their phone for purchases) and an increasing demand for efficient and secure online/mobile payment services is likely fuel the rise of financial technology to complement and accommodate the needs of the people.​

The development of the fintech infrastructure is further fuelled by Berlin’s entrepreneurial culture as well as Germany’s strong economy. The test now is whether it and other German cities including Munich, Frankfurt and Hamburg can sustain the recent high level of investor interest.

In terms of preferred services, banking and lending continue as the dominant segment closed followed by online marketplaces, aggregators and intermediaries. This is reflect in the fact that the rise of banking entities such as Number26 and Solaris Bank as well as intermediary lender Finanzcheck which comprise two of the three largest fintech funding deal in Europe in 2016.Let us take a closer look at the factors that drive this fintech Ecosystem: British people sometimes complain about how centralized the economy is with London the UK economy but for fintech, this centralized base is a huge advantage, making it easy and efficient to gather techies, bankers, investors and digital growth hackers all in one room. Germany, on the other hand, as mentioned earlier, is quite fragmented in its fintech ecosystem as well as its economy with hubs such as Munich, Berlin and Frankfurt occupying characteristically different segments of the economy. But Germany does have its own set of advantages that pave the wave for its fintech boom:

Germany has a massive economy and shares borders with German speaking neighbors in Austria and Switzerland. Germany may not be as big a domestic market as America (#4 in GDP ranking) but it is one large homogenous market and while the independent states in America still have a lot of local regulatory power when it comes to finance, Germany is part of the European Union, which in aggregate, is a bigger market than the US and more homogenous when it comes to financial regulation. As a result of such a large domestic market, the consumer focused service providers tend to stay within Germany for a long time, allowing them to establish themselves and the product without early unnecessary international exposure and media attention. For example, SOFORT has a name that is clearly designed to resonate with German speakers and would sound strange to American ears. SOFORT grew quietly and were then acquired by Klarna. Many German fintech ventures have grown without any splashy VC funding rounds that get covered by the tech media. This is true across Europe (for example, Saxo Bank from Denmark).

This allows for the establishment of an ecosystem that has fintech ventures which are bigger than one would guess from the lack of name recognition. Many are B2B (white label), which means they don’t spend any time or money getting name recognition among consumers. For example, 360T was reported as trading $55 billion FX trades per day in March 2013. This makes Germany prime hunting ground for Growth Equity Funds such as Summit and General Atlantic that like to invest large amounts when a company is already well established and then help them grow as a private company.

Cliché as it may be, Germany does, in fact, have fantastic engineering infrastructure both at the production and education level. This is complemented by the notion that Germans have a deep aversion to hype. They prefer engineering to marketing and cash to plastic. German Banks were deeply wounded by the hype and shady marketing of subprime assets hence many German fintech startups view engineering as the best way to fix the broken global financial markets reflecting a very high focus on product development and refinement versus publicity and marketing which allows for long term utility for their products and services, a quality that is very attractive to potential investors worldwide.