How to navigate a successful German expansion?

In our “Unlocking the German Fintech Market Potential” series, we continue exploring the business potential of the German FinTech and digital finance ecosystem for foreign start-ups and banks.

According to Deutscher Startup Monitor, there were over 2k start-ups in Germany last year. Although the number of FinTech start-ups changes depending on the source[1] definition of FinTech, there currently seems to be around 1k FinTech start-ups in Germany. That means one thing: every second or third start-up in Germany is planned as a FinTech, and the competition is fierce.  

So how can entrepreneurs navigate success in such a crowded, competitive ecosystem? So far, we have explored the German financial patterns & consumer culture and the 5 mistakes to avoid when entering the German FinTech market. Our series’s third and last article will outline the questions that need to be asked before the German expansion and wrap up with some practical expansion tips.

Three Critical Questions to Ask Before the German Expansion

There are three critical questions to answer before moving to Germany, and they are not necessarily FinTech-specific.

• “Why are we moving our services to Germany?”

It might be tempting to relocate to or grow towards one of the biggest economies in Europe. This is especially true

• if the business has no more place to grow in its home market,
• if the business originates from another German speaking country,  or
• if the business has close ties to the substantial minority communities in Germany (e.g., Turkish, Arabic, Russian, or Greek communities).

However, these are not reasons alone to relocate or expand to Germany. These communities can have a different need base than you imagined or might be too small to base a business case on (e.g., “bank account for Arabic migrants or business lending for immigrant entrepreneurs). If you don’t already have a specific answer to this question, you should find a vital touch point in Germany to start from.

• “Do we have any touchpoints in Germany?”

When relocating or expanding (to any country, really), start-ups and businesses should ask whether the target country promises a customer base, talents, a vivid ecosystem, or a market gap. These touchpoints should also be evaluated with the language, cultural, and digital adoption barriers in mind. The lack of a competitor can mean a market gap or can also mean a lack of market need or proper infrastructure. If none of these touchpoints exist (as backed by user and market research), it makes sense to take a step back and re-evaluate the expansion decision.

• “Do we have enough budget to survive in Germany?”

Once the answers to the first two questions are set, businesses should evaluate whether they can survive the next 6-12 months in Germany following the expansion, considering the set-up costs, tax implications, logistic and HR costs, and other operational expenses. Start-ups should look into potential funding sources and VC opportunities and assess whether there are any strategic or financial investors they want to be close to in the target country.

Five Tips for Successful Integration in Germany

In addition to preparing for the critical questions and avoiding common mistakes, foreign FinTechs and banks can have a smoother integration (and might encounter less resistance) with the help of the following tips:

Localization via IBANs and T&Cs:

We have earlier stressed the importance of localization and its impact on trust (your most important ingredient for financial services). Although a significant portion of localization depends on language/communication and local management, that’s not all there is. Repeated experience in the German market shows that German consumers are likely to trust correspondence addresses and IBANs. Therefore, foreign IBANs can become a competitive disadvantage for consumer FinTechs, depending on the target audience.

Local Partners vs. Foreign Partners:

Similar to the IBAN topic, the choice of partner might significantly impact the expansion project’s success. Potential customers will likely look at the BaaS and other technical partners and judge the business accordingly. Depending on the product and the financial touchpoint, using a non-German BaaS partner or getting the banking license from a different member state might raise questions. For licensing processes, sometimes building trust using an Estonian or Luxembourg-based license or entity might result in a longer trust-building process. As for the partners, since consumers will have a direct relationship with these providers (through bank communication, T&Cs, statements, etc.), using recognized names might decrease the number of battles you need to fight.

Utilizing the Power of the German FinTech Ecosystem:

Building a network is essential in any innovative business to share experiences and grow the ecosystem. However, in the FinTech ecosystem, being a part of a relevant group can be crucial for lobbying or for overcoming unclarities when regulations are not so clear. In Germany, start-ups can join different associations for horizontal and vertical networking. For instance, the Association of Federal Banks accepts FinTechs as extraordinary members, allowing them to mingle with banks and financial institutions. Bitkom and the Berlin Group also welcome eligible members. Additionally, the Financial Ministry has FinTech advisory and regulatory discussion groups. Even if you do not qualify for a membership, you can alert them of your coming and keep in touch and prepare for the future. Remember that such connections are likely to serve as a stamp of approval for your business. As an alternative, joining one of the start-up associations, such as the Startupverband, can help with cross networking.

Plan Long Term:

As we have already talked about the meticulous and detail-oriented German culture, it only makes sense to align for better integration. Businesses should make long-term plans regarding their product, operations, and regulation strategies, as German customers expect them to do. Waiting until the launch date to look into the applicable employment laws, checking a trademark’s availability, or submitting the tax declaration last minute can impact the reputation since „word gets around.“ As can be observed by the rapid rise and the fall of the instant delivery platforms due to the alleged employment law violations and devaluation, an innovative idea can be good. Still, a legal and ethical idea is much better.

Small Things Matter (Still):

Last but not least, small things matter and are appreciated, also in Germany. Although corporate gifts and extravaganza are not a big part of the German culture and are not expected from financial service players, your partners and customers would always appreciate a well thought holiday card or Advent calendar during Christmas. Try to buy a desk calendar with German state and country-wide holidays after arriving in Germany, marking off days and ensuring not to bombard leads with e-mail during Pfingsten. 

If you need a hand with taking the first steps to the German FinTech ecosystem or need a quick clarification, contact us, and we will be happy to play a role in your success story.

Our expansion series end here, but we will continue our column in the following months with more relevant FinTech and banking tips.

[1] According to the Startup Monitor of the Startup Verband, there were +700 FinTech startups in Germany in 2021. Payment and Banking mark this threshold with 1056 German FinTech startups.