Part II: 5 Mistakes to Avoid When Entering the German FinTech Market

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.

Last month, we explored the German financial patterns & consumer culture and revealed the local difference in terms of thinking and financial management.

Regardless of the domestic learnings and success stories your company might have, clocks reset to zero the moment your company decides to enter the German market. Like all markets, the biggest economy in the EU has unique challenges and opportunities and must be studied carefully before a market entry. Unfortunately, since many corporates and ventures do not do their homework sufficiently before entering the market, we see only a tiny fraction of foreign FinTechs and banks capturing the market’s attention.

So, how to avoid throwing the German market project in the bin? Let’s take a look at the five common mistakes we have been observing as starters:

1. Assuming that you can transfer your business to Germany, „Einfach so“:

All markets are different and require prior research, preparation, and strategizing. But sometimes, entrepreneurs do not want to invest time in the preparation phase to gain time due to limited budget or overconfidence, which usually turns out to be an oversight. The projects that start with the „Let’s enter this market and see how it goes“ usually end in the start-up graveyard. After all, domestic success is not proof of future success, and assuming that you can transfer your business precisely as it is in the domestic market can cost you, especially in the financial markets. Even if there is a market gap or demand for the planned product, business operations could work differently in Germany.

Your branding might not work well or have wrong affiliations you are unaware of. You might encounter cultural barriers, or the habits you want to change might feel good for consumers. When imagining hundreds of potential scenarios, a quick reality check can save you from a costly lesson in market research. In the end, your first interaction with your customers in the new market will be the most important for building your brand awareness. You shouldn’t base this moment on assumptions, market whispers, or copycat models and strategies.

2. Not having a local management team or making decisions abroad:

Companies that would like to grow with their core team, even in foreign markets, demonstrate employer loyalty. However, all markets have their dynamics, and trusting your operations to a team that isn’t experienced in the new market can put you on the back foot. We see a good number of foreign corporations book a ticket to Germany for their top executives, who have never even been to Germany, and expect wonders back at home. Your domestic A-team might have succeeded in your home market but will likely struggle in the new market without prior know-how and network. Even if they are quick learners, they will still lose precious operational time while trying to understand the local dynamics and making mistakes.

Instead of sending domestic executives to mission impossible, you can entrust locals (interim managers, consultants, or outsourcing parties) to kick off the operations and help with the integration until you complete the local team. A similar principle applies to decision-making. Due to the difference in market dynamics, the expansion and country managers should be in the front and not in the back seat when exploring new market opportunities. However, most foreign Fintechs and banks rely on decisions made abroad by board members that do not know the territory. As long as the market managers have no autonomy, forcing them to be directed by a team or a board sitting in another country will create unnecessary layers, hinder innovation cycles and potentially create a conflict of interest.

3. Relying on translations instead of original copy and marketing material:

Sometimes we see an ad or a billboard and ask ourselves what we just read. This result is very typical for direct translation copies. Although it might feel convenient to translate a message that worked before for another market, relying on translated marketing and sales materials would be a mistake. The appeal of translated copy declines further when describing the particularities of financial products in a rule-based language like German. For local integration, companies should use copy and content writers that think like locals. Alas, we see many start-ups rely on translations for cost-cutting reasons or because they don’t have a local workforce. Since German culture strongly emphasizes „preservation,“ Germans are sensitive about their language and do not enjoy the non-native or sloppy copy patterns.

Such an approach could even impact the brand’s trust and professionalism perception. Language sensitivity should also be observed when switching from another German-speaking country like Austria or Switzerland to Germany (or vice versa) as there are differences in dialects and vocabularies. Regional service providers should additionally aspire to fulfill the local language and cultural expectations (e.g., for customers from Saxony, Bavaria, or Berlin) to create a bond with the local culture.

4. Not investing in a thorough regulatory analysis:

As mentioned in the first article of our series, regulatory compliance belongs to Fintech 101 in Germany. Although Germany being a part of the European passporting scheme makes expansion from and to Germany more accessible, not all FinTech services fall under the cross-border service scope. Therefore, founders expanding to Germany with the „standardized European regulation“ dream usually feel demotivated by the unexpected turn of events, sometimes to the extent that they decide to close the shop.

Even under the cross-border service scheme, service providers might need further authorizations or comply with additional (consumer protection, data privacy, etc.) regulations, which might impact daily product operations. Also, it should be kept in mind that having approval in another European country doesn’t guarantee authorization in Germany. Regulators have different interpretations, approaches, and working styles, especially regarding novel business models. Knowing these nuances can make managing deadlines, processes, and expectations easier.

5. Assuming BaaS cooperation is a walk in the park:

Speaking of regulatory compliance, no one can deny that Banking-as-a-Service and embedded banking providers have made it easier for entrepreneurs to test and launch ideas without regulatory hassles. Germany has a lot to offer regarding white label banking, payment, and crypto services, and some market participants are even en route to becoming household names. Although these providers‘ primary purpose is to enable other businesses and create revenue, assuming they are not selective is one of the biggest mistakes foreign Fintechs make. BaaS companies are somewhat „loaning“ their BaFin licenses, so the license should be considered their most vital asset, explaining the protective approach. These providers are selective, diligent, and even demanding to some extent. As an entrepreneur or executive, you should not assume that the BaaS will want to work with you „when they hear about the business opportunity“ and should prepare thoroughly, as if preparing for an audit, before contacting a BaaS. Otherwise, you might not even be able to find a point of contact. Also, getting familiar with these providers‘ services and prices would be helpful when building a local business case.

Can you relate to any of these mistakes? Don’t worry; it’s still not too late. To err is human! Stay tuned for the last article of our series next month to learn more about successful market entry tips and strategies.

Already published in the series:

• Die Besonderheiten deutscher Konsumenten und Organisationen

Headerbild: Bildnachweis: fstop123