Regional focus
According to the European Commission, German banks’ return on equity is 1.9% – well below the EU average figure of 6.1%.
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still king with many vendors. But this is changing. It’s exciting, because it shows that there is still growth potential for digital banking, even in a relatively saturated banking market like Germany.” N26 is one of the leading players in this vibrant scene. Founded in 2013, it now offers services across 24 European countries, and has more than eight million customers – though it recently pulled its operations from the US and the UK, with a view to shifting focus to its core European business. It is currently the best- funded German neobank, with a €780mn Series E funding round, bringing its total valuation to €7.8bn. Raisin, one of the largest German fintechs, is in a similarly auspicious position. As a marketplace, which offers consumers access to savings, investment and pension products, it has benefited from the recent spike in interest rates, having already reached profitability. “Because people are looking at savings products more, it’s been a fantastic 12 months for us across geographies,” says Lueth. “We now have basically a global footprint.”
The number of Sparkassen (savings banks) in Germany.
International Monetary Fund 14% CNBC 18 Funding challenges
The percentage drop in Deutsche Bank’s share price during a single day in March.
Overall, though, profitability is a sore point for many neobanks, which have historically pursued growth at their peril. Last year, a global drop-off in VC funding meant investor expectations changed, valuations tumbled, and losses soared. One casualty was the German neobank Ruuky, which filed for insolvency in January 2023 after failing to secure fresh cash. “Venture capital-backed companies – not just in banking – have been able to prioritise fast growth over profitability for a long time,” says the N26 spokesperson. “Since 2022, the focus has shifted towards reaching profitability more quickly, and sacrificing growth instead. But there is no switch that you can press today and then you’re suddenly profitable overnight.”
Lueth adds that, for a lot of fintechs, the big question is: when did they last fundraise? “There are some lucky ones that raised in 2021, and if they treated their funds conservatively, that takes them a long way,” she explains. “But for companies that missed that window, it has become a lot more difficult. Capital has become more expensive. This can be a challenge for companies that are not yet far enough along in their development.”
German banks have also faced a tightened regulatory environment, following the collapse of disgraced payment company Wirecard in 2020. BaFin, Germany’s financial watchdog, has imposed a client growth cap and made it harder for banks to change their terms and conditions. These changes have hit neobanks especially hard. Despite its successful funding rounds, N26 has racked up significant compliance costs and a €4.25m fine, as well as constraints on growth. This April, the company laid off 4% of its staff, and has reportedly placed its plans for an IPO on ice. “It is important to note that our headcount reductions were not a matter of cost savings, but an effort to align our team structures with our most important strategic priorities – compliance and sustainable growth,” argues the spokesperson, who emphasises that the bank is on track to reach profitability on a monthly basis in the second half of 2024. Perhaps so – but what we are seeing for German banking is clearly very mixed. That’s as you’d expect, given the difficult macroeconomic backdrop. There are big concerns around profitability, both for established players and neobanks, and the sector is certainly not invulnerable to economic shocks.
On the other hand, many banks have risen admirably to the challenges of recent times, suggesting that Germany’s long-standing reputation for monetary prudence isn’t entirely undeserved. ●
Future Banking /
www.nsbanking.com
canadastock/
Shutterstock.com
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