Berlin: A FinTech Hub for SME Finance Innovation
Navigating Berlin’s Vibrant SME FinTech Hub: An Introduction
Berlin has become a major FinTech hub. Berlin is home to more than 300 of them, making it the leading city in Germany, Europe’s largest economy. The city’s success in FinTech can be attributed to established banks setting up innovation departments, international payment companies tapping into the talent pool, and a supportive ecosystem with government subsidies and investment incentive programmes. Notable unicorns such as Trade Republic, N26, Mambu, Wefox, Raisin DS, Sumup and Solarisbank dominate Berlin’s vibrant FinTech landscape. Its international appeal attracts investors and talent due to its well-connected ecosystem and lower costs compared to other major European cities. Berlin’s global influence is further enhanced by collaborations with international players and the symbiotic relationship between traditional banks and FinTech startups.
Berlin’s 300 FinTechs encompass all aspects of financial life and needs for both individuals and organizations, essentially covering everything from “birth to cradle.” In this piece, we will narrow our focus to FinTechs targeting SMEs, a particularly intriguing niche.
Germany is overbanked. SMEs are not.
Germany is considered to be heavily overbanked. While the retail market is really cut-throat, this is not the case for financial services for SMEs. Why is that?
Historically, before the age of digitalisation, Germany’s financial system relied heavily on its banks. From bustling metropolises to remote villages, bank branches were ubiquitous. As a result, bank loans were the primary source of finance for SMEs. However, securing bank loans was, and often still is, a challenge for SMEs due to insufficient collateral, limited creditworthiness or loan amounts deemed too small by banks. SME entrepreneurs have to rely on their creativity as alternatives are scarce.
As a rule of thumb, around 10% of the German workforce is considered to be self-employed, either running their own SMEs or working as freelancers. For the incumbents of the financial services industry, this 10% represents an edge case – hard to reach, hard to provide the right products and hard to service.
Germany’s SME banking system primarily comprises three pillars:
- Large universal banks like Deutsche Bank or Commerzbank.
- Regional banks such as Sparkassen and Volksbanken.
- Specialist banks focusing on specific sectors like automotive retail or healthcare professionals.
However, due to the branch-based approach of the incumbents or their focus on serving a single industry, SMEs, characterized by their size, often find themselves underserved. To be exact, financial services for SMEs tend to lag behind. Innovations in finance, initially introduced to retail customers, typically take an additional three years to reach SMEs. While SME entrepreneurs are certainly not slower to adopt digital solutions, they are simply served later in the process.
Although they account for only 10% of the workforce, SMEs provide 57.6% of jobs in Germany, making them an extremely important player in the labor market. SMEs make a significant contribution to both turnover and net value added. In addition, SMEs invest substantially in research and development, thus promoting innovation in the economy. They also contribute to export revenues, are a stable economic pillar in Germany and provide training opportunities.
SMEs being hard to reach, hard to provide the right products and hard to service – these are obstacles that Berlin’s FinTech startups have boldly tackled head-on.
Berlin’s FinTech Frontier: Spearheading Finance Solutions for SMEs
The approach of Berlin’s FinTech startups differs from that of the incumbents in three main ways.
Firstly, FinTechs are stepping into this niche with significant advantages. Digital solutions are inherently remote, enabling FinTech startups dedicated to SMEs to bypass the complexities of banking branches. They can concentrate on specific demands and markets, offering tailored services to SMEs without being constrained by geographical locations.
Secondly, FinTech startups are highly demand-driven. While banks often adhere rigidly to their core business models, FinTech companies have the flexibility to evolve into various lines of business. For instance, FinTech startups address not only capital provision but also offer solutions for bookkeeping, ERP, invoicing, and more. This blurs the lines between financing, which involves the provision of capital, and finance, which relates to the organization of an SME’s financial affairs.
Thirdly, Berlin’s FinTech ecosystem extends beyond a mere collection of modern financial service providers; it operates as a network collaborating on product bases, providing interoperability for its customers. SMEs require an integrated financial software stack where solutions seamlessly work together to ensure smooth processes that can be automated to the greatest extent possible. Therefore, from the customer’s perspective, they need an ecosystem of solutions that complement each other.
However, according to seasoned FinTech entrepreneurs and their investors, the adoption by SMEs has not occurred as rapidly as projected in many business plans. The reasons for this may vary, with the primary factor likely being trust. Establishing trust is challenging for FinTechs, as it requires time and consistent performance. Trust is cultivated through actual usage and experiencing reliable and trustworthy financial services. This presents a significant challenge for FinTech entrepreneurs to unravel, akin to a complex Gordian knot.
Mapping Berlin’s SME FinTech Terrain: From Cash Registers to Crowdfunding
Let’s take a closer look at some of the most notable segments of SME FinTechs in Berlin and explore their innovative solutions across various sectors:
- POS systems: Companies like Sumup, Orderbird or Zettle and many others offer advanced payment terminals and/or cash register systems equipped with digital tools for efficient transaction processing and sales tracking, enabling SMEs to improve their operational efficiency.
- Payment solutions: FinTechs such as Ratepay or viacash provide cutting-edge payment solutions tailored to the needs of SMEs, offering seamless and secure payment processing across multiple channels.
- Digital business accounts: FinTech startups such as N26, Qonto or Kontist offer digital business account solutions that simplify banking processes for SMEs, giving them convenient access to essential financial services.
- Vouchers: Platforms such as Spendit or Clink are revolutionizing voucher management for SMEs, offering digital voucher solutions that streamline promotions and increase customer or employee loyalty.
- Invoicing & Accounting: FinTech companies such as Candis, Sorted or Agicap are transforming invoice management and accounting processes for SMEs with innovative digital solutions, automating tedious tasks and improving financial transparency.
- Merchandise Management Systems: Companies such as Enfore or Weclapp provide comprehensive merchandise management systems that optimize inventory management and streamline supply chain operations for SMEs.
- Debt collection: FinTechs such as Pair Finance provide automated debt collection solutions that help SMEs collect outstanding payments more efficiently and reduce financial risk.
- Factoring: Platforms such as Tilta specialize in factoring services tailored to the needs of SMEs, providing them with flexible funding solutions to optimize cash flow and support business growth.
- Equity-based crowdfunding: FinTechs such as Companisto are democratizing access to finance for SMEs through equity-based crowdfunding platforms, connecting them with investors and facilitating the raising of capital for growth and expansion.
If you take the time to click through all the links above, you will see that many FinTech companies are home-grown in Berlin, but a significant number of international FinTechs have chosen Berlin as their German headquarters.
Charting New Territories: International FinTech SMEs Thrive in Berlin
With headquarters in London, plus various hubs around the world, and unicorn status, SumUp initially focused on providing payment terminals for SMEs. Marc-Alexander Christ, SumUp’s co-founder and newly appointed COO, recalls the genesis of the startup in 2012: “I met my co-founder Daniel here in Berlin, introduced by a mutual friend when Daniel happened to be passing through. We sat down for lunch just two hours later. He had started SumUp six months earlier, and I joined as co-founder and CPO.” The founders identified a global problem: some merchants were being neglected in the payment process, especially small retailers. SumUp targeted this niche market, transforming payments from a luxury to a necessity and drastically reducing costs for merchants by a factor of ten.
Despite fierce competition from 20 rivals, SumUp thrived thanks to investor backing, early global expansion and hyper growth after achieving operational profitability. While competitors focused on cash transactions, SumUp carved out a niche by serving both new customers and those underserved by existing providers.
Technologically, SumUp acts as both acquirer and payment facilitator, prioritizing direct customer engagement. The company today operates in 37 countries.
Headquartered in London, with major hubs in Berlin, Dublin and Sofia, SumUp’s Berlin office excels in developer talent, hardware innovation and European marketing. Commenting on their marketing focus in Berlin, Marc-Alexander humorously remarks: “It was a coincidence! We started recruiting across our four offices and found a lot of skilled marketers in Berlin. It’s the perfect place for marketing”.
SumUp aims to evolve from a one-trick-pony provider to a multi-product company, with its vision centered on an ecosystem of financial solutions, including business accounts and cards.
Marc-Alexander underlines Berlin’s appeal: “Berlin is fantastic. When we’re recruiting globally, and we mention Berlin, there’s tremendous excitement. Even when we expanded to Brazil, I thought everyone would flock to Copacabana. But no, Berlin remains the first choice, even for Brazilians!”
Qonto, another globally recognised unicorn, is headquartered in Paris. In 2020, the company entered the German market with a modest local team, choosing Berlin as its base of operations. Founded in 2016, Qonto is active in the highly competitive SME banking sector.
Lukas Zörner, who leads today’s Qonto team in Berlin, says: “In my opinion, Berlin stands out as the clear leading FinTech city, and rightly so. Why is that? Well, because Berlin has an incredibly open network of individuals and supporters. Whether they’re former founders, investors or part of the wider ecosystem, Berlin offers a superlative environment for newcomers and foreign entrepreneurs alike. This open network is not only transparent, but also immensely valuable and beneficial for fostering growth and innovation.”
When Qonto ventured into the German market in 2020, Lukas found himself on the other side of the business landscape. At the time, he had been laboriously building Penta, an SME banking startup also based in Berlin, from the ground up. The intriguing question is: How did he become a key figure in a rival company? The answer lies in Qonto’s acquisition of Penta in 2022, which marked the completion of the merger between the two companies.
Lukas adds: “I believe the next step for Berlin is to continue to improve its ecosystem by bringing more diverse players on board. We also can’t forget to share our success stories, both nationally and internationally. As Germans, we often tend to be overly critical, but we have numerous successes to celebrate and showcase. This is something I personally would like to see more of.”
Destination Berlin: A Future-Ready FinTech Haven
When given the choice, numerous national and international FinTech entrepreneurs are opting for Berlin as their preferred destination, whether as their headquarters or as a national office. This trend has established Berlin as a prominent beacon of innovation and opportunity within the global FinTech landscape. Berlin’s thriving FinTech community provides an ideal environment with an exceptional talent pool, solid infrastructure and a nurturing ecosystem. The latter includes a vibrant funding scene teeming with business angels and VCs.
However, while the potential for expansion in Germany is considerable, navigating the country’s complex financial market landscape requires careful consideration and thoughtful planning. Like any other member state of the European Union, Germany adheres to its financial regulatory framework and institutions.
Germany’s small and medium-sized enterprises (SMEs) are relatively evenly distributed throughout the country. However, Berlin is an ideal location to reach this target group, as almost all SME-related organizations, such as associations and lobby groups, have offices in the capital. This makes them prime partners in improving the lives of SME owners.
In conclusion, for FinTech entrepreneurs considering their next step, whether it’s starting a completely new business or expanding an existing one into the German market, the city offers them a unique set of features. Dive in and decide for yourself!
Text: Clas Beese, Freelance Journalist and Content Creator for FinTech, linkedin.com/in/clasbeese
Header image: © Adobe Stock
