Fintechs, young companies that apply innovative financial technologies in the financial sector, pursue a range of highly diverse business models. Some fintechs are active in the insurance sector supplying innovative sales solutions, some offer apps that analyse users’ financial situations, and others provide IT solutions for banks or insurers.

BaFin’s general market observation activities cover both fintechs with business models that involve providing a financial sector service subject to mandatory authorisation or registration, and companies it is not responsible for supervising.

Market observation as part of BaFin’s digitalisation strategy

Under its digitalisation strategy, BaFin investigates at the strategic level how innovative financial technologies are impacting on, and possibly also changing, business models and processes in the financial sector. The digital transformation of the financial sector is analysed from a holistic perspective, and this analysis cannot be restricted to the entities BaFin supervises. The goal is, and will remain, to carry out BaFin’s statutory mandate, which is to ensure the integrity and stability of the financial sector and protect consumers’ collective interests – and also to do this in an increasingly digitalised market environment.

For its general market observation of fintechs in Germany, BaFin makes use of a variety of publicly available sources, which are therefore also accessible to public criticism. Before making use of a study, BaFin also scrutinises the purpose for which it was intended by its publishers. This ensures that only sufficiently well-founded, verifiable data about what is happening on the market are evaluated. In addition to this, BaFin is engaged in ongoing dialogue with the market and the academic community.

The sources discussed above indicate that the fintech segment is currently going through a phase of consolidation. They suggest the boom in the establishment of new fintechs seen during the years prior to 2017 has tailed off. Several explanations are given for this: competition is increasing, acquisition costs are high at the customer interface and funding is not consistently available.

Winner-takes-all competition between fintechs

It is apparent from the sources that the winner-takes-all phenomenon is widespread when it comes to start-ups in the financial industry. As a rule, just a single business model or fintech in each segment manages to attract the critical mass of customers or users that makes it interesting for investors. With the funding advanced by investors, the fintech in question is able to further improve its product, raise its profile with advertising and ultimately displace rivals from the market. This contributes further to consolidation.

Nonetheless, given how the financial industry is suffering from innovation bottlenecks while technological development is striding ahead, the feeling is that establishing start-ups could be lucrative in future as well. The technologies that are currently central for fintechs, and will be in the years to come, are artificial intelligence – combined with big data – and distributed ledger technology. On this basis, the sources suggest it is to be assumed that start-ups will continue to be established and their numbers will increase again in future.

Competition and cooperation

In comparison to previous years, established companies and fintechs are reported to be competing directly against one another far less often at the customer interface. Nevertheless, it is still apparent that fintechs focus on niches and fill gaps at the customer interface that traditional businesses do not want, or are unable, to occupy.

The competition at the customer interface is believed to have resulted in many fintechs switching their business model over from B2C (business to customer) to B2B (business to business), in other words no longer competing with the traditional financial companies at the customer interface, but being integrated into banks’ or insurers’ value chains as service providers. Many new start-ups are focussed directly on B2B. This trend is said to be encouraging cooperation between fintechs and established businesses. At the same time, fintechs have evidently been cooperating with, and even taking over, other fintechs.

The sources show that the cooperations between fintechs and traditional companies are essentially being driven by the synergy effects on both sides. While fintechs bring their agility and IT know-how to the table, established businesses contribute their access to customers, their large data resources and their regulatory know-how. This development is said to have been accelerated by the way the fintechs have professionalised themselves over the years.

Evolution, not revolution

The fintechs’ influence on the sector is described as still being evolutionary in nature. The disruption that was expected a few years ago has not occurred to date, and is not to be anticipated at the moment either. Rather, the sources point to the potentially revolutionary threat posed by digital, platform-driven providers from the USA and China, who could conquer the market if they were to exploit cooperations or acquisitions in order to offer financial sector services – that went beyond payment transactions – at the customer interface (see “Financial companies as mere suppliers?”, 25 November 2019). However, there is a recognition that these bigtech companies’ success, particularly on the Asian market, cannot be translated directly onto the European and German markets because the market structure and user behaviour are different there.

The prospects for fintechs are believed to lie in their agility and innovativeness, as well as the synergies that are achieved with traditional businesses. In future too, established companies will leave gaps that will be closed by fintechs.

Technical differences and clashes of corporate culture when they cooperate with other companies are regarded as being among the biggest challenges faced by fintechs. Furthermore, they are described as not always finding it easy to identify and implement possible supervisory obligations, especially when they first start operating and when they make changes to their business models.

BaFin’s role

BaFin’s supervisory activities are competition-neutral and technology-neutral. It is not one of BaFin’s tasks to promote innovation or investment. Nor does it conduct industrial policy.

Like the law to be applied, BaFin’s administrative practice is essentially technology-neutral. BaFin will supervise a company if it engages in business or provides services that are subject to mandatory authorisation or registration on the basis of the various pieces of legislation that govern technical supervision. The statutory scope of this technical supervision is determined irrespective of the technology deployed for these business activities. By contrast, the specific risks of these technologies are taken into consideration by BaFin in its monitoring of the requirements concerning proper business organisation that are imposed by the relevant technical supervision legislation.

Information for companies and contacting BaFin

BaFin has sought to remove any obstacles that might prevent start-ups and fintechs from obtaining information or making contact with it by providing an extensive range of information on its website, where it addresses common fintech business models and their regulatory implications, as well as giving providers the option to get in contact with it through digital channels – either in German or in English. About 150 inquiries reach BaFin by these means each year.

Dialogue with the market is fostered in particular by events organised by BaFin, such as the BaFin-Tech conference, which is aimed at both established and young companies in the financial sector. This year it proved possible to draw on expertise from the Federal Ministry of Finance, the Federal Commissioner for Data Protection and Freedom of Information, the Deutsche Bundesbank, and the Digital Hub Initiative and the High-Tech Start-up Fund, two initiatives launched by the Federal Ministry for Economic Affairs and Energy, thus expanding the event’s perspectives beyond the immediate imperatives of financial supervision. For instance, BaFin-Tech 2019 (see “BaFin-Tech Conference: Who monitors the bots?”, 28 October 2019) featured a discussion on the development of the market and the prospects for fintechs with a panel of market experts and contributions from the floor. The debate that took place there also confirmed how worthwhile and successful proportionate, technology-neutral supervision is.