Berlin may be best known for its alternative culture and creative industries. However, with its startup friendly environment, a skilled and cosmopolitan workforce, and none of the post-Brexit uncertainty embroiling London, the German capital is also becoming one of Europe’s fintech powerhouses.
Will Berlin soon take London’s fintech crown? That will probably take a few more years – if at all. Despite its strengths as a startup hub, Berlin also faces some serious challenges such as the lack of financial infrastructure and strict regulation.
But what is it about Berlin, or any city for that matter, which cultivates fintech growth?
My experience founding a fintech startup has led me to believe that there are four environmental factors which are intrinsic to the success of any fintech – the financial ecosystem, the regulatory environment, the talent pool, and the cost of doing business.
Thriving start-up scene, but lack of financial infrastructure
Berlin is Germany’s fintech hub with a third of the country’s fintech companies being based in the capital. And Berlin’s startup industry continues to grow vigorously: in 2017 total investment amounted to 3 billion euros, three times as much as in the previous year. The high concentration of startups and its international talent pool make Berlin an attractive location for fintech founders.
However, there are hardly any banks or major corporations located in the capital. And while Berlin boasts with technology expertise, Germany’s financial expertise is (still) concentrated in Frankfurt and Munich. This makes it harder for Berlin’s startups to network and to exchange ideas with established companies. After all there’s a clear trend towards collaboration: more and more fintechs around the globe are cooperating with traditional financial institutions, bringing their innovative products to the mass market.
Initiatives such as the cooperation between Deutsche Bank and Axel Springer Plug & Play in Berlin aim to promote young technology companies in the banking and insurance sectors. These efforts could help to close the geographical gap between the capital and Germany’s traditional financial metropolis, Frankfurt. To make a real difference, however, far more banks and financial service providers would have to establish a base in Berlin.
Regulation as a barrier
In Germany, fintechs often face high market entry barriers. Financial regulation is—for good reason—heavily geared towards consumer protection and can make it difficult for young (and established) companies to bring new ideas and concepts to market.
Regulation is indispensable to strengthen the stability and credibility of the financial industry and to protect the interests of consumers. However, too much bureaucracy and overly strict regulation can easily thwart startups and slow down innovation.
Smart regulation should help to protect consumer rights and boost financial stability, whilst promoting diversity and innovation. The Financial Conduct Authority (FCA) has demonstrated that this balancing act can succeed. From our point of view—and this may be typically British—the FCA opts wherever possible for pragmatic solutions in the regulation of credit markets, which could also be helpful for continental European approaches. At the same time, however, German regulator BaFin also endeavours to support market participants in the implementation of regulations through the publication of various guidelines.
Berlin attracts talent from home and abroad
The competition for talent in the fintech industry has intensified in recent years. A study by recruitment website Indeed revealed that 20 percent of the top fintech jobs are left unfilled after 60 days.
In terms of hiring, Berlin is an easy sell to young, international people with digital skills. In many startups, English is becoming the common language, which entices non-German speakers. The cost of living is still cheaper than in most European capitals, Berlin boasts a rich cultural life and ample leisure facilities, and the local startup scene is thriving. This attracts many young people from home and abroad.
Recruiting employees with financial expertise can be more difficult though. The fact that the vast majority of banks and financial service providers are headquartered in Frankfurt or Munich not only complicates networking but also access to workers with financial know-how.
Competitive location costs
Renting office space in Berlin is still significantly cheaper than, for example, in London, New York or Paris, which has a positive effect on location costs. Widely available co-working spaces also offer affordable alternatives to the traditional office and promote collaboration and innovation in the city.
In addition, visa costs for non-EU citizens are relatively affordable compared to other countries: for example, a German working visa costs an employee €60, compared to the €477 demanded by the British government.
There is still room for improvement
Berlin as a fintech location doesn’t have to hide from its international competitors. Germany’s complex regulatory environment may, admittedly, have a deterrent effect. But all in all, business founders here find good startup conditions, international talent and an inspiring environment. For Berlin to take the position as Europe’s leading fintech hub, however, the city’s financial infrastructure needs further improvement.
Jens Woloszczak, Founder and CEO of Spotcap