Regional focus
savers find better rates. “Even during the past decade, when interest rates were very low, savings products have had an extremely prominent place in the average German saver portfolio. That’s particularly the case compared to a lot of Anglo-Saxon markets, where participation in the stock market is a lot higher.” So far, so steady-handed. On closer inspection, however, the sector is more complex and dynamic than it might at first appear – a rapidly changing landscape in which neobanks and incumbents have it all to play for.
The big picture
Germany currently has around 1,400 banking institutions, down from about 3,000 in 1999. Since the turn of the century, in short, there has been a wave of consolidations, including a much-touted merger between Deutsche Bank and Commerzbank that ultimately didn’t happen. Competition is fierce – unsurprising for such a large and heterogeneous sector. Broadly speaking, Germany’s banks can be understood in terms of three distinct ‘pillars’ – private banks, cooperatives and savings banks. Unlike private banks, the latter two operate mostly on a regional basis. That means city dwellers are more likely to bank privately, whereas those in villages and rural areas would typically use their local savings bank or cooperative. The regional banking sector is extremely broad, and dates from a time when Germany consisted of dozens of independent states. They run the gamut from the Hamburger Sparkasse (the largest savings bank in Germany, with €57.5bn in total assets) to the Stadtsparkasse Bad Sachsa (the very smallest, with assets of just €130.6m). Within the private banking space, by contrast, there are only three large banks – Deutsche Bank, Commerzbank and Unicredit – along with 139 smaller ones and 22 foreign entities. Non-German banks have been actively involved in the country for more than a century, testament to the role cities such as Frankfurt play in European banking more widely. “It’s a market where consumers are used to foreign banks playing in the market,” says Lueth. “ING has a German banking licence, to give one of the most prominent examples of banks that have come in from the outside. I think that’s fairly different from the French market, for example, which is a very national one compared to Germany.”
There are other differences across the Rhine as well. Compared to the rest of Europe, profitability among German banks is low. That’s deliberate for savings banks and cooperatives, which have an explicit mandate to maximise customer welfare, even if that means focusing less on profits. It’s less intentional for the private banks, which have been underperforming from a profitability perspective since the 2008 financial crash. According to the European Commission, German banks’ return on equity is only 1.9% – well below the EU average of 6.1%, and barely enough to cover
Future Banking /
www.nsbanking.com
capital costs. Stress tests earlier this year showed that eight out of 14 German banks fell below the EU average for capital, while a 2022 YouGov survey found that trust in Germany’s financial sector lagged behind the global median.
The issue here is that poor profitability can lead to less resilience in a crisis. We saw this play out in March 2023, when markets were rattled by the sudden collapse of two US lenders – Silicon Valley Bank and Signature Bank – along with the hurried takeover of Swiss giant Credit Suisse by UBS. Amid waning investor confidence, both Deutsche Bank and Commerzbank saw their share price plummet. Asked whether Deutsche Bank could be next in line to fold, German chancellor Olaf Scholz said there was no need to worry, arguing that the institution “has thoroughly modernised and reorganised its business and is a very profitable bank”. He wasn’t wrong: together with Commerzbank, Deutsche Bank has undergone major restructuring in recent years, and these efforts have paid off for both lenders. This year, Deutsche Bank reported its highest pre-tax profits since 2011, while Commerzbank’s profit increased by almost 50% in H1 2023. But it’s clear that Germany’s banking sector, belying its safe and steady reputation, is just as vulnerable to outside shocks as any of its neighbours.
The rise of neobanks
Against this backdrop, it is no surprise that Germany’s neobanks have been swift to carve out their own niche. This, after all, is the leading country for fintech in continental Europe, with significant growth across the neobanking market, and thriving tech hubs in Frankfurt and Berlin. According to data from FinTech Global, the transaction value of German fintech is projected to reach $95bn this year, reaching $196bn by 2027. User share will grow from 4.2% to 6.3% over the same period, dominated mostly by younger customers and expats.
“Only a few years ago, young people had very little trust and would have literally rather gone to their dentist than deal with their bank,” is how a spokesperson for N26, a Berlin-based neobank, puts it. “Neobanks have changed this by being able to quickly respond to changing customer expectations, and successfully attract an increasing number of consumers as a result.”
This growth comes as a corollary of digitisation, as traditional banks move away from their legacy infrastructure and start embracing technology. In 2018, for instance, only 53% of German banks used the cloud, according to a PwC survey. By 2021, that figure had risen to nearly 80%, and is poised to rise further still.
“Compared to a number of other European markets, Germany has some way to go in terms of digital payments,” says the N26 spokesperson. “Cash is
Katharina Lueth, chief client officer and managing director, Raisin.
$95bn
The transaction value of German fintech this year.
Fintech Global 17
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