Erik Podzuweit (left) and Florian Kappert.

The Future of Fintech: Where is the Financial Industry Headed?

Fintech startups are currently taking over. Long-time giants in the financial industry have come to realize that if they don’t want to get left behind in the process of digitization, cooperation with innovative companies is inevitable. Most recently, Wirecard replaced Commerzbank on the DAX, a German stock index. We spoke with two founders from the fintech sector about what makes the industry so exciting and how it might look in the future. Erik Podzuweit is the CEO of Scalable Capital and Florian Kappert heads the company Bilendo.

What do you find fascinating about the fintech industry? What are your personal interests in the area?

Erik: I think it’s exciting to see how big data and machine learning can be used to finally make financial services better and less expensive for private investors after decades of stagnation. Financial services are not only about suddenly being able to order a product from the comfort of your home or being able to navigate your way through the mountains better on your bike.

Asset management deals with vital issues, such as your standard of living when retired. Particularly in this area, a lot of people are constantly guilt-ridden because they aren’t putting enough money aside for retirement. At the same time, they also lack the courage or simply don’t have enough time to deal with the subject. That’s where we can offer real added value as digital asset managers.

Florian: Both the finance and insurance sectors are – and have been – controlled by large companies, some of which are multinational. Technological developments in the last 30 years have established extensive structures and a high degree of complexity. Different laws in the area of taxes and regulatory activities make matters even more complex and eventually result in extremely rigid structures. Moreover, these companies have an extremely hard time developing solution-oriented, modern and scalable tech products.

We fintechs (or insurtechs or tech startups in general) have a much easier time in that arena because we were able to start working on a greenfield. That allowed us to look directly for an efficient solution to prevailing problems. Centralizing all customer demands (which is the core of digitization) is the ultimate goal; cutting-edge technology is a means to an end.

That often – but of course not always – gives rise to solutions from startups that manage to make it out of their niche and their approach becomes extremely popular.

That is exactly where I see the biggest challenges and that is my personal interest. Over the years, we’ve often proven our ability to develop great tech products. I think classic intermediary services (as are almost all finance and insurance products) will be dealt with without any assistance from a bank or insurance company in the future. The marketplace will instead be demand-oriented platforms that automate the exchange of these services. These solutions have significantly lower transaction costs and, with the right approach, also have a better business case.

To what extent have fintechs already changed the financial sector and which upheavals are still to come?

Erik: Fintechs have forced the bank strongholds to rethink things. After all, banks no longer have enough energy to also deal with dissatisfied customers, a dwindling number of customers or the loss of other business divisions. Rethinking things isn’t enough, though. Banks also need to shift how they work. But that is still difficult for them. They do not want to and cannot internally cannibalize themselves from one day to the next. With their large network of branches, expensive funds departments and ancient legacy systems, a lot of banks simply are no longer competitive in the long run.

Florian: The financial sector is in the throes of upheaval. The market is tearing down structures. The market conditions add even more pressure. Customers are offered services from other IT giants that, in terms of user experience and customer experience, have much more advanced capabilities compared to banks. I think the huge changes are actually going to happen in the next 10-20 years. Current technologies from the research sector are going to prevail. Where and how touchpoints will look between the new financial service providers and customers remains completely unclear. What’s certain is that the usage behavior and demands from customers (B2B and B2C) will fundamentally change. New end devices and demand-oriented offers will dominate. The question is who will manage to do it best. The best solution will win.

Establishing trust is the biggest challenge by far

What challenges do fintechs startups find themselves confronted with?

Erik: I don’t think that can be generalized. B2B fintechs, for example, are facing completely different challenges compared to B2C fintechs, which primarily have to get private customers on board with their idea. Because fintech deals with people’s hard-earned money and savings, establishing trust is the biggest challenge by far. We have to make sure we don’t lose that trust when a wave of consolidation hits.

Florian: Startups get older too, structures are established, processes are determined and laws apply just the same to new companies. The challenge will be to remain functional and agile while still offering a product or solution that is modern and technologically up to date.

“Politicians are overburdened by global developments”

What needs to happen politically for fintech to reach its full potential?

Erik: In general, I actually don’t think there are any major political obstacles for fintechs. We received our approval from the German Financial Supervisory Authority (BaFin) very quickly, and we always felt we had a very cooperative and innovative partner by our side.

A good deed that politicians could do for investors would be to introduce higher tax-free allowances for direct investments in stocks and ETFs. In return, government support for complicated and expensive pension plans and insurance products should be eliminated. I see that as an obvious disincentive for savers. Still many private investors think they’re doing something meaningful for their retirement when, in fact, that kind of saving is making them poor.

Florian: Nothing. Politicians are completely overburdened by global (and IT) developments. That’s not generally due to politicians, but rather to the structure and history of politics. Politics are held to the same requirements as companies. It’s just that politics still work like they did 20, 30 or even 2,000 years ago. The structures, agility and most especially transaction costs are much too high in this system. Transaction costs are equivalent to “the voice of the people” in this case, and that voice can hardly make it into the system efficiently.

The only thing that would really help would be super-fast internet everywhere. It’s ridiculous that Germany looks so pathetic in that respect.

Fintech and the old economy get along well

How is the relationship with the “old economy”? How can potential obstacles be conquered and problems be handled together?

Erik: We have a very good and trusting relationship with our investors and business partners, regardless of whether they’re from the old or new economy. We successfully cooperate with Siemens Private Finance and met Erivan Haub, who really is a fantastic entrepreneur and investor. We work just as well with Holtzbrinck Ventures, a classic risk capital provider, as we do with BlackRock and ING-DiBa, which merge both worlds together.

Florian: We get along well, at least most of the time. The problem with the old economy is, as mentioned above, that it very rarely develops good IT products. That’s due to the know-how and mindset of the companies. The old economy will only manage to make the transformation to new companies if all of the necessary resources are available. That doesn’t work too often, because structures are blocked by law and order (for example, all kinds of stakeholders).

The best option is definitely to start on a greenfield yourself. But then you still have the problem with know-how, or at least cooperation with a fintech company.

“German saving patterns are a real problem”

What do you think the biggest current trends are in fintech?

Erik: There’s going to be even more cooperation between fintechs and banks. Banks have understood that they can’t acquire the necessary know-how quickly enough or that they can’t put digital business ideas on the market fast enough. That’s why they’re cooperating more and more frequently with fintechs. We’re also experiencing a market shakeout. At the moment, clear market leaders are emerging in many fintech sectors in Germany. That will make the financing opportunities and, in turn, the growth opportunities more difficult for all other fintechs.

Florian: Misusing the term “artificial intelligence” for marketing purposes and giving naive customers a metaphor that explains why a solution is better than the status-quo.

How will fintech change our society?

Erik: It will definitely be for the better. First off, fintechs make many classic bank services easier, faster and cheaper. The more time-consuming bank transactions a robot does for us, the more time we’ll have to enjoy the good things in life. Moreover, fintechs are much more transparent than classic financial institutions. That’s why we also have the opportunity as an industry to restore public trust in the financial sector. That relationship has still not recovered due to the many German bank scandals since the financial crisis. That ultimately harms the economy as a whole.

As the founder of a digital asset manager, I also want more people to be interested in capital investments. The love that Germans have for instant access accounts and savings accounts that hardly earn any interest is a real problem. A lot of people will not be able to uphold their standard of living with that kind of saving behavior. It is also a major societal challenge that statutory pension insurance can only compensate for to a certain degree.

Florian: The key term here is consumerization. Everything is becoming easier to use, more automatic, more user-friendly and more needs-based. These benefits also come at a cost, because everything will become more expensive, more complex and less transparent. That certainly has a major impact on salaries, the professional job market and all economies in general. It will definitely be very interesting!

Munich is a top location with a problem here or there

How would you gauge Munich as a location for fintechs? What advantages does it offer, and where might there be room for improvement?

Erik: The environment is very good for fintechs: Munich has two excellent universities where we can recruit really good people as a tech company. Munich also provides the ideal economic environment. We have Holtzbrinck Ventures as a Munich investor and Baader Bank is our partner bank in Munich. Siemens Private Finance is also an important cooperation partner from the “old economy” in Munich.

An additional locational advantage is the cooperative and innovative branch office of the Bundesbank which locally issues permits for banks or investment consultants on behalf of BaFin for Munich fintechs. We were also quite pleased with the political support we received. Ilse Aigner supported us from the very beginning. Without her, several key contacts with our current business partners wouldn’t have been established or would have happened much later.

Florian: Munich is the best. Of course there aren’t as many startups as in Berlin. That’s a problem for small startups in particular, because you can’t meet as many players at events or the founders basically already know each other from school or college.

But for all startups that plan to cooperate with the finance, insurance, automotive or IT sectors, Munich is ideal. The salary levels and cost of living are problematic, but that’s increasing massively in Berlin as well. The job and housing markets are also problematic. There just happen to be several DAX-listed corporations in Munich along with the German and European headquarters of US IT giants.

Nonetheless, Munich is still a kind of hamlet or village. That can be annoying sometimes, but by and large, you can still operate well from Munich. Employees from abroad are also happy to come to Munich because it’s an attractive location where both the city and its surroundings have a lot to offer.

Thank you for the interview!