There have been plenty of innovations in payment and banking in recent years. However, the FinTechs and also the innovations of the old-established ones concentrated on a few target groups – millenials and early adopters.
The classic FinTech target group is by no means a large part of the population but, as we all always suspected, only a fraction of it. Even if the pitch decks of every FinTech or business case of every alleged innovation solution of a bank point to the masses of users who could be convinced with such a solution, reality (and thus the bare facts and figures) is a sobering one.
What the Germans earn – the German income
Let us approach reality with statistics (all figures from Statista). In Germany, 4.3 million people of working age received the HartzIV. A further 1.2 million people are so-called “top-ups” – people who receive transfer payments from the state despite being employed. The average gross wage per month in Germany (2017) is €2,863 (tax class 3, 1.5 children, no church tax) – this corresponds to €2,113 net. So much for Mobile Payment, where you need a smartphone in the >600€ class to be able to participate at all.
If you break down the statistics a little further, the reality becomes even harder.
Source: Institute of the German Economy, Cologne
The interactive chart above shows very impressively the net income distribution in Germany and Europe. Furthermore, the graph tries to classify the population into income groups. The low-income stratum (income less than 60% of the median net income) amounts to 16.5% of the population in Germany in 2014 (!). This stratum is acutely endangered by poverty. Converted this means that 13.39 million people (population in Germany in 2014 was 81.2 million according to the Federal Statistical Office) have a monthly net income of maximum 994 €. The low-income middle class comprises 15.8% i.e. 12.83 million with a monthly net income between 994€ and 1,324€. If one roughly adds the number of people up to the monthly median net income, one ends up with approx. 56.67% (the bar in which the median lies was counted completely).
Many numbers are not always easy to digest, therefore we only remember the following about 56% of the population so 45.47 million people a month do not earn more than 1656 € net.
Germany in comparison
In our industry we always like to look across the pond in the direction of the USA and as is well known, the USA has challenges in the distribution of income. But if one compares the percentage figures, then 62.5% of the comparable income group (up to 110% of the national median income) are in the population.
The Federal Reserve in the US recently stated that 46% of family households in the US could not afford to spend $400 (htttp://fortune.com/2016/05/26/400-dollar-expense-study/ – based on 2015 figures) without selling or borrowing. The 6%, which compares better with Germany, doesn’t look very reassuring.
Even in a comparison within Europe, Germany is by no means in a particularly good position.
But what does that mean now?
What have we learned nice from the depressing statistics?
Any Fintech product and innovation ignores 60% of the population and develops cheerfully products for a maximum of 20% of the population (high income and high income middle class). With a reasonable knowledge of math you can see that with 20% you certainly can’t achieve real market penetration – as great as we all think Apple Pay is, it’s a niche product.
But is there really nobody in the FinTech sector who serves this customer group (<= income median)? Let’s start with a small excursus.
Which providers come to mind immediately with this customer group? Clearly the discounters like Aldi or Lidl. Who else? KIK, Primark and Tedi are certainly also perfectly suited to this customer group. Can you still think of a start-up? Maybe even one that is extremely successful? How about FlixBus, for example?
The forgotton customer group
The Value Proposition of FlixBus is: Cost-effective from A to B with acceptable comfort. The explosive growth of FlixBus shows that there are enough people who prefer to spend 4-5 hours on the bus for 9.99€ than to travel many times more by train or even plane (despite Ryanair and EasyJet) across the Republic. So this group of customers would like to enjoy the same travel pleasure, but is willing to sacrifice time (4-5 hours by bus) for a very low price.
If you try this with the other examples, you will notice that neither Aldi nor KIK will win a prize for “best store equipment”. Furthermore, Aldi and Lidl like to queue a little longer and have to accept that certain items are simply sold out. Time and convenience versus price seems to be a factor to be able to serve this customer group successfully.
“Time and convenience versus price seems to be a factor to be able to serve this customer group successfully. “
Back to FinTechs – What is the argument with which most FinTechs come around the corner? Right – design and convenience, then push and always online.
Anyone who has ever gotten lost in the branch of a bank on the first day of a month completely doubts the statement that nobody is going to branch anymore. In fact, on the very first day of the month, queues form in front of the branches and crowds of people wait patiently until it is their turn to have almost their entire credit balance handed over in cash. Nothing to do with card payments and other types of cash – Cash is king! Expenditure control takes place in euros and cents and not in any fancy app. By the way, this behavior has real disadvantages for merchants (more on this below).
And then suddenly a FinTech comes to mind, which this customer group has not lost sight of – cash payments. How abstruse it sounds to the FinTech disciple with 3-4 credit cards from any Challenger Bank that you should buy something online and then make the payment by paper printout at a supermarket checkout.
But similar to FlixBus you can see that the customer group wants to participate in the trend “eCommerce” despite the low purchasing power. However, since expenditure is controlled by counting the banknotes in the pocket, the use of cash payments is only a logical consequence.
However, it should not be concealed that this solution, as well as the cash behaviour of this customer group, entails a number of problems. The “emptying” of the account naturally causes problems in the case of collection / seizure, which in part end in a downward spiral (default surcharges, interest on arrears, horrendous collection fees). This cash outflow, or rather the facilitation of consumption, although the money would be “better” invested in debt service, is certainly a partial aspect that one should consider here.
Installment payment providers should actually serve this customer group, but the reality is that the algorithms / risk checks of the providers are designed in such a way that the customer group around the income median is rather sorted out.
There was once a super successful FinTech – not in Germany but in the UK – which served this customer group so successfully. Some already know that it can only be Wonga.
Wonga’s business model was simply put, the online variant of the credit shark – by the way with one of the simplest apps on earth. In the early years, Wonga was so successful in offering its customers micro-loans at usurious interest rates without collateral that Wonga’s investors could hardly be proud to walk away. The same investors also quickly removed the name from their portfolio lists when it became clear that a) the regulator would put an end to the hustle and bustle and b) the outcry of the “milked” customer group and the press would not stop. Wonga represents the implosion of the entire Payday Loan sector in the UK. The overdue regulation banned usurious interest rates and introduced efficient customer protection.
Innovations and products from FinTechs and banks for the customer group (people with income up to the median) are completely lacking. With a few exceptions, some of which are doubtfully successful, the “Aldi des Payment und Bankings” or the “FlixBus Fintech” are missing. That this start-up will come from Berlin Mitte, I believe, can be ruled out with certainty. But as you can see from examples from other industries (retail, fashion, travel) this customer group has the same need to participate in today’s trends, but there is a lack of real offers.