Bi-Monthly June 2023
Berlin is still the place where finance and tech come together in Germany - but it needs to prepare itself for next decade
The unique thing about Berlin as a center of finance and innovation: while some financial centers are looking for a symbiosis of the traditional banking sector with the still emerging digital world of fintechs, Berlin completely reinvented itself in the last decade. It is in the top position in the EU when it comes to growth of its fintech sector.
150 years ago, Berlin was Germany’s financial center, and its newly established banks and insurance companies gave globalization in industry and trade an unprecedented dynamism. Today, a large number of technology-based financial start-ups, the fintechs, continue this tradition and shape the digital financial world of the 21st century from Berlin. Intelligent infrastructures through cloud services, the application of artificial intelligence (AI) and distributed ledger technology drive the dynamic development of the financial industry in Berlin and around the world.
Not least because of this strength, Berlin is a global frontrunner when it comes to innovations in the finance and technology sector. Berlin's lead over other financial centers in Germany is enormous. Berlin ranks #2 behind London in Europe. More and more successful players from North America and the Asia-Pacific region are coming to Berlin.
Something new has been created
A mixture of freedom, internationality, and a healthy distance from traditional financial centers such as Frankfurt am Main have contributed to the fact that something new has been created in Berlin. And the technology-driven financial sector in the capital has developed rapidly compared to other financial hubs. Of the more than 1,000 fintechs currently operating in Germany, more than a third are based in Berlin. Six of the seven German unicorns, i.e. fintechs with a market valuation of over 1 billion euros, have their home here. The undisputed top position of the German capital is also visible in the amount of investments – around 2.5 billion euros in 2022 which represents 94 percent of all fintech investments in Germany.
But the steady growth of fintech values to over 22 billion euros in Berlin and of VC investments peak of 4 billion euros in 2021 since the beginning of the start-up boom a decade ago came to a stop during 2022. Tech companies devaluated massively worldwide – due to the interest rate hikes of the central banks and its effects on the investment climate.
For the time being, this development is the culmination of a rapid momentum over the past decade combined with the slowdown in 2022, still ongoing this year. The fintech sector is experiencing some adjustments which urgently calls for a better competitive environment in startup Germany compared to other countries like UK, France, Sweden, the Netherlands, and Switzerland.
The development of the financial and tech scene in Berlin is to a significant extent the result of a momentum of its own and must be seen by everyone in European competition. Attractive locations such as London, Amsterdam, Barcelona, Madrid, Paris, Stockholm, and Zurich are the direct competitors. Berlin would do well to take a thorough inventory of the advantages and disadvantages of the location, the factors where there is still room for improvement, and those aspects that could stand in the way of continuing the success story.
The successes that have been rightly celebrated in Berlin so far at many award ceremonies on rankings are those of a decentralized, rather uncoordinated approach. Since the local stars have long since outgrown their infancy, we in the Berlin industry, together with politicians as part of the Berlin Finance Initiative, have recognized that it is time for further development to support the success of the past and to bring the fintech ecosystem to the next level.
The questions arise: What growth conditions are needed to make the financial and innovation location fit for the coming decade? How to attract and to educate the best talents? How to share knowledge and cooperate better with universities and business schools? What about diversity in companies and financial literacy in the society? How to take advantage of disruptive innovation such as digital currencies, blockchain and web3? Can data security and data use be reconciled in the German – in the European – framework? Is there a need for a politically supported strategy or is the decentralized approach the one that will continue to bring success to the finance and technology hub in the future?
Needs for the Berlin finance and tech hub
Before the question of an overall political concept arises, it is important to perceive the factors that promote and inhibit the long-term growth of the industry and to look at their further development. Hardly any other sector of the economy is subject to such regulation and supervision as the financial sector. This applies in particular to the areas that have grown and, increasingly, to the emerging new digital players in the square.
It is also true that regulation must be careful not to overshoot the mark and to impose the same rules on the same risks. Asymmetrical distribution of information on the financial market is a fact of course and so the customer side naturally needs special protection. But to the same extent, regulation must keep an eye on how digitization helps to reduce information distortions from within the market.
In addition, the local financial ecosystem needs efficient, innovation-open, and high-performance supervision with contact persons in the city. The Deutsche Bundesbank has established their fintech unit in Berlin since 2019. The Federal Financial Supervisory Authority (BaFin) is having its third BaFin-Tech summit in Berlin this September.
In this sense, the dialogue between the above-mentioned authorities, sustainability bodies, consumer protection organizations and the financial sector must also be channeled. The link between digital policy and the promotion of innovation should be established. In this way, policymakers can flank and strengthen the megatrend of digitization and the technological penetration of all sectors of the economy.
Sustainability is key
Additionally, it must consistently follow digitization paths and develop modern processes itself, for example in administration. The future prosperity of a business location depends on the ability to understand technological trends and processes, to steer them in good directions where necessary and frequently to create or promote infrastructures and contexts for them.
In addition to digitalization, the transformation towards greater sustainability is an important aspect at the site. The establishment of a "sustainability data pool" that determines the ESG status quo (ESG stands for Environment, Social, Governance) in the real economy and thus facilitates a secure guideline for the actions of banks and fintechs with regard to sustainability (keyword: sustainable finance) is important, as is the creation of access to capital, such as through the networking and integration of venture capitalists and other financing options.
It is also important to retain and promote talent and attract new ones. This includes exploiting the potential of the existing higher education landscape, expanding structures dedicated to knowledge and technology transfer, launching a qualification offensive in the direction of so called “MINT” subjects (mathematics, computer science, natural sciences, and technology), but above all using and expanding Berlin's diversity.
Since Berlin is the digital financial center 4.0 and this is where innovations are created, many questions need to be answered, and the transfer of knowledge between all stakeholders needs to be expanded. After all, the "young and wild" startups are turning into established companies and even listed companies. The course set up today therefore plays a decisive role in determining the future success of this business sector. In Berlin, the door to the digitization of the financial world has been opened. Now the aim will be to shape what lies ahead and lead it to success by representing all aspects of Berlin as the German digital financial center. Both, the previous and the new Berlin state government under the leadership of Governing Mayor Kai Wegner (CDU) and Senator for Economicy Franziska Giffey (SPD) have recognized this strategic necessity and expressed their support for creating a House of Finance & Tech (HoFT) in the coalition agreement.
In order to successfully develop Berlin as a sustainable financial center 4.0 the support and determination of its government and acting politicians as well as stakeholders from the private sector are required. Now perhaps more than ever.
Achim Oelgarth, Co-Founder & Co-CEO and Maximilian Riege, Co-CEO | Berlin Finance Initiative