Fintech versus house bank: "Politics in Germany focuses on banks"

 "According to a survey, the house bank is still the first point of contact for medium-sized businesses when it comes to lending. Above all, this has to do with trust. How can fintechs assert themselves there?

There are an estimated 3.5 million small and medium-sized companies in Germany. They stand for more than 99 percent of all companies in this country and for every second euro that is earned. 

 

The lubricant of their business are loans to finance investments or to pay suppliers. 

 

Traditional banks continue to cover most of the credit market in Germany. But for some years now, financial technology companies, or fintechs for short, have been pushing their way into the field with their own digital platforms. These include the credit platforms Auxmoney, Creditshelf or Iwoca. But how are the new competitors being accepted on the market?

The loan brokerage platform Iwoca for small and medium-sized enterprises (SMEs), together with the market research institute Yougov, carried out a survey among 514 small businesses.

 

 The majority - six out of ten respondents - stated that their house bank was the first point of contact to find out about loans in a professional context. 

 

According to the survey, the popularity of the banks increased by 11 percent in the pandemic compared to 2019. A survey by the Institute for SME Research suggests that small and medium-sized companies preferred their existing relationships with commercial and house banks to new forms of financing during Corona (IfM) from July.

Trust important

A medium-sized company from Lower Franconia, whose company is family-run, has a clear opinion on the subject: You wouldn't go to an online bank. Precisely because the personal is also important. The company has been looked after by two banks for years, which is why there is trust. Assuming things went bad for two years in a row, the bank would probably be nervous and ask for the numbers. You can of course explain that much better to a Raiffeisen bank or a Deutsche Bank if you have known them for years.

 

On average, around four-fifths of the credit volume of small and medium-sized businesses in 2017 was accounted for by the respective house bank. 

 

According to the Yougov survey, however, only 28 percent of those questioned were of the opinion that their credit needs would still be best covered by a traditional bank. In 2019, the financing volume of small and medium-sized companies via digital platforms from Fintechs amounted to 3.8 billion euros, according to the IfM. Compared to the overall market, this is only a tiny fraction. But for the past six years, the range of fintechs has been growing by around 150 percent annually.

Fintechs as an alternative

From the perspective of the Institute for SME Research, the financial start-ups are particularly well positioned where lending processes can be standardized. 

 

Fintechs can offer an alternative to both young start-ups that have no credit history and small companies that require little financial resources - and are therefore not very attractive for many banks.

 

No impulsive decisions are made in the credit sector, says Iwoca boss and founder Christoph Rieche. For many small companies it is still the case that the house bank is the main discussion partner. That has hardly changed over the years. Nevertheless, in the course of the pandemic, a giant leap was seen in the area of ​​digitization - even if not so much in digital lending.

From Rieche's point of view, this also has to do with KfW's corona subsidy programs. That brought many companies back to the banks. Only they could have participated in the subsidy programs, said Rieche. Digital providers like Iwoca, on the other hand, who usually do not have their own banking license and cooperate with other institutes, were not involved. If you had been locked in, you could have ensured good competition, says Rieche. “Politics is focused on banks,” he says.

In comparison, the start-up in Great Britain was involved in the state-initiated liquidity program Coronavirus Business Interruption Loan Scheme. In addition, since May 2020, the platform has been able to grant loans totaling £ 400 million to small business owners. Lending should be regulated by the market rather than government subsidies. One must therefore ensure more competition and remove hurdles."