Where Did FinTechs Come From, and Where Do They Go? The Transformation of the Financial Industry in Germany After Digitalization

Abstract

The digitalization of financial services opened a window for new players in the financial industry. These start-ups take on tasks and functions previously reserved for banks, such as financing, asset management, and payments. In this article, we trace the transformation of the industry after digitalization. By using data on FinTech formations in Germany, we provide first evidence that entrepreneurial dynamics in the FinTech sector are not so much driven by technology as by the educational and business background of the founders. Furthermore, we investigate the reactions of traditional banks to the emergence of these start-ups. In contrast with other emerging industries such as biotechnology, a network analysis shows that FinTechs have mostly engaged in strategic partnerships and only a few banks have acquired or obtained a financial interest in a FinTech. We explain the restraint of traditional banks to fully endorse the new possibilities of digitalized financial services with the characteristics of the technology itself and with the postponed fundamental decisions of banks to modernize their IT infrastructure.

How do banks interact with fintech startups?

“…Alliances across the four countries examined are most often characterized by a product-related collaboration, which is a comparatively less institutionalized form of alliance that offers little or no control in the product and service development process of a fintech. This finding is consistent with the theoretical observation that financial innovations may by particularly difficult for a bank to contract and internalize through an acquisition (Brandl and Hornuf 2020;Scott et al 2017;Teece 1986). From a managerial perspective, this raises the question whether banks should use this form of alliance to outsource their innovation activities and thereby become increasingly dependent on fintechs and other partners for ensuring digital transformation.…”

“…A related article to ours is that of Brandl and Hornuf (2020), who run a bank-fintech network analysis for Germany and find that most relationships are productrelated collaborations. They argue that this is because most fintechs develop an algorithm or software solution, the value of which can only be determined over time, when the software has been adapted more thoroughly to customer needs.…”

“…A lack of legacy infrastructure and comparatively low level of organizational complexity often enable fintech firms to be more agile, innovate faster, and be more radical in their approach to innovation (Brandl and Hornuf 2020). By contrast, it is more difficult for traditional banks to adapt to some of the new technological developments because they need to comply with more extensive regulatory requirements.…”

“…Offering fintech services or applications on their websites helps banks maintain their customer base without having to develop new services or applications themselves. Often, developing these services or applications alone is a cumbersome task because many banks operate software systems that are barely compatible with modern end-user applications and suffer from organizational legacy (Brandl and Hornuf 2020). Moreover, because many fintechs offer software solutions, which must be customized to end-user needs and updated at regular intervals, acquiring a fintech is risky for a bank.…”

Analyzing the Impacts of Financial Services Regulation to Make the Case That Buy-Now-Pay-Later Regulation Is Failing

“…Germany has a strong publicly-owned banking sector and, compared to regulation in the UK, is considered to be more riskaverse [37]. Germany also has a notably large fintech market with around EUR 17 billion in transactions processed through a fintech platform in 2017 [38]. However, despite the rise of fintech platforms in the region, fee-based BNPL platforms have largely escaped regulatory scrutiny.…”