Impact and effects of innovations in the financial industry in Germany

An empirical analysis

Master's Thesis, 2021

94 Pages, Grade: 1,0


Table of Contents

I List of Figures

II List of Tables

1 Introduction
1.1 Abstract
1.2 Research Method and Questions
1.3 Research Approach and Limitations ofthe Study

2 Literature Review
2.1 Definition of Banking
2.2 The German Banking System
2.3 Types of Banks
2.4 Definition of FinTech and background
2.5 Modern and open banking

3 Methodology
3.1 Research methodology and justification ofapproach
3.2 Data collection and analysis
3.3 Technique of data collection, verification, and limitations
3.4 Philosophy of the research

4 Theoretical Framework
4.1 Definition and Management of Innovation
4.2 Innovation Culture and Strategy
4.3 The innovation process and framework requirements
4.4 Fintech Business Models
4.4.1 Crowdfunding, -investing and -lending
4.4.2 Credit, Factoring and Payments
4.4.3 Investment and banking
4.4.4. Robo-Advice and Associated Services
4.5 Impact and effects of regulatory and environmental changes on FinTechs
4.6 Comparison of FinTech and Banking Business Models

5 Research Study
5.1 Conceptual Framework
5.2 Study Design and Questions
5.3 Key findings ofcollaborations between FinTechs and banks
5.3.1 Hypothesis 1: Banksfacilitate the market entry ofFinTech start-ups
5.3.2 Hypothesis 2: A) FinTech start-ups with highfinancialfunds applyforproper banking licenses rather than initializing own collaborations and B) banks increase FinTech's profits
5.3.3 Hypothesis 3: Incumbentsfacilitate FinTech start-ups the developmentofnew products and services
5.4 Enablers of cooperation between FinTech and market incumbents
5.4.1 Summary of key results
5.4.2 Practical Example: Design Thinking as instrument to foster innovation in banking

6 Conclusion
6.1 Critical Acclaim
6.2 Outlook and future research


I List of Figures

Figure 1: Research Process

Figure 2: The financial system

Figure 3: Structure of a financial intermediary

Figure 4: Elements of the German Banking System

Figure 5: Business Models of German Banks

Figure 6: FinTech Market Segmentation

Figure 7: Number of FinTech start-ups in Germany

Figure 8: Sub-processes of the payment process

Figure 9: The triangulation process

Figure 10: Stages ofthe innovation process

Figure 11: Closed innovation process

Figure 12: Open Innovation Process

Figure 13: The Learning Organization

Figure 14: Cooperation between FinTech companies and established banks

Figure 15: Concept of Design Thinking

Figure 16: Framework to implement innovations in banking

II List of Tables

Table 1: Taxonomy of research methodologies

Table 2: Definitions of Innovation

Table 3: Enablers of the open innovation paradigm

Table 4: Comparison between banking license and e-money license

Table 5: Sample of Interview Questions

1 Introduction

1.1 Abstract

The internet and digitalization tremendously affected many economic sectors, and both take increasingly influence over the financial services industry in Germany. New founded start-up companies, so-called FinTechs, connect innovative technologies with financial products and services and attack established players of the financial industry (Benlian et al., 2014). While the Fintech industry constitutes a new dynamic and short-living market environment, the innovative strengths of new market entrants put pressure on financial service companies and banks in Germany (Gimpel et al., 2018). To assess the importance and impact of FinTechs on the financial industry and economy in Germany, a comprehensive amount of data including market size and market structure is needed (Dorfleitner and Hornuf, 2016). Particularly against the background of associated chances and risks of growing FinTech industry, an examination of the market size and impact is of tremendous importance to examine the innovative potential of FinTech business models (Schweizer et al., 2017). Low interest rates and risky business models in the aftermath of the financial crisis proved a lack of innovative thinking of banks and financial service companies in Germany. Indeed, FinTechs tend to have a stronger focus on customer needs thus closing existing market gaps better than traditional banks (Barberis and Chishti, 2016).

Undoubtedly, this observation manifests in corporate finance when traditional banks neglect small and medium enterprises as potential clients. Particularly in market niches, FinTechs establish digital marketplaces connecting customers and facilitating the consumption of core banking products and services (Müller et al., 2011). Recently, the European Union announced that existing market entry barriers for FinTech start-ups would be dispelled. After the enacting of Basel II and Basel III Schindele and Szczesny (2015) analyse that core banking activities such as e. g. credit lending for small and medium enterprises became less profitable and partly even unprofitable for banks. While Dorfleitner and Hornuf (2016) confirm that notion, they highlight that the promotion of FinTech start-ups is constrained with risks but to judge the chances and risks of collaborations between FinTechs and established banks. Indeed, sufficient research is required to investigate the FinTech market in Germany and to examine how financial innovations and digitalization can help incumbents (Haddad and Hornuf, 2016).

1.2 Research Method and Questions

The study begins with an overview of the financial industry in Germany, its characteristics, and the consequences of the financial crisis plus the effect of the low-interest policy of central banks worldwide. Insurers and other financial service companies are neglected throughout the study. Furthermore, an evaluation of literature referring to the German FinTech industry, its innovations and digital business models is undertaken. While the FinTech industry in Germany comprises a young and dynamic industry, due to a lack of sufficient literature and data about FinTech start-ups, a qualitative approach is considered (Barberis and Chishti, 2016). A sample of meaningful studies is used to complete missing quantitative data depicting an encompassing picture of FinTech start-ups in Germany. The main body of literature originates from the German Government, the German Central Bank, the European Central Bank, journals, books and scientific releases of banks and consulting companies. While case studies validate the findings of the literature review gaining further strategic insights into banks and FinTechs, the research study further validates the findings using structured interviews. Particularly the pressure on formerly successful banks and financial services companies by innovative FinTechs as new market entrants, also called as the innovator's dilemma shall be examined (Christensen, 2013).

First, the leading question of chapter 2 is to carve out how financial markets and customer behaviour changed alongside the digitalization of the financial industry in Germany. This development entails new forms of customer interactions and fundamentally changes organizational structures of market participants such as financial institutions and banks. While the methodology is explained in chapter 3, the characteristics and types of innovations are defined in chapter 4 and the impact of FinTech business models on the financial industry in Germany is evaluated focusing on financing, asset management and payment services. Furthermore, the chapter highlights the differences between traditional banks and FinTech's business models and outlines chances and risks. The purpose of chapter 5 is to explore case studies with qualitative data on FinTech's in Germany to investigate and figure out whether the quantitative findings presented in literature are sufficient. The primary research goal is to examine how the innovative strengths and potential of FinTech start-ups can be used in cooperation with incumbents. Therefore, distinct/orms of collaborations between banks and FinTech's are critically assessed on several indicators. The final chapter 6 begins with a comparative analysis evaluating the findings of the literature review and interviews drawing an overall conclusion. Differences and abnormalities are pointed out and the author provide a prospective outlook and highlights areas for further research. Figure 1 summarizes the research approach and outlines the intended structure of the present thesis.

Figure 1: Research Process

Research Process

Abbildung in dieser Leseprobe nicht enthalten

Source: Own Illustration

1.3 Research Approach and Limitations ofthe Study

The FinTech industry in Germany constitutes a dynamic and constantly changing market environment (Moritz and Block, 2014). Before analysing the current body of literature, the research approach and limitations of the present paper are highlighted. While the quantitative resources are listed in the bibliography section and mostly originate from books and economic journals, further qualitative resources stem from case studies and scientific field studies of consulting companies, banks, and financial services companies (Paddags, 2017). Hence the number of scientific papers about FinTech's in Germany is scarce, high­qualitative case studies and semi-structured interviews are considered to complement existing research gaps in literature. Conclusively, a mixed approach using current literature, semi-structured interviews and case studies is used to perceive more data and information of the FinTech market in Germany (Dorfleitner and Hornuf, 2016).

However, several uncertainties and changing determinants regarding FinTech start-ups on the financial services market in Germany remain: The financial authorities in Germany, particularly the Federal Financial Supervisory Authority (BaFin) and the government, have neither conveyed how the FinTech industry is legally evaluated as a whole nor established a regulatory framework (Paddags, 2017). Since the current legal framework in Germany assesses FinTech's from a conservative perspective, some business models of FinTech start­ups operate under uncertain and indefinite legal conditions on the German market. In comparison, the Financial Conduct Authority (FCA) in the UK appears to be more open towards FinTech start-ups and the emergence of innovative financial business models (Altunbas et al., 2011). This impression manifests when looking at the number of FinTechs and market volumes in the UK and Germany. In comparison, the British market volume, and the number of registered FinTechs is notably higher than in Germany (Niemand et al., 2017). In fact, the acquisition of sufficient data regarding the long-term impact of FinTech start-ups on financial companies in Germany is difficult due to a limited number of publications and longitudinal studies. As a result, some hypothesis and assumptions throughout the present study rely on indications and trends from other countries with a longer FinTech-history.

2 Literature Review

Since the emergence of FinTechs and digital business models in the financial industry in Germany, the amount of literature about open banking and the digital banking evolution considerably increased (Hornuf et al., 2020). This development entailed a new understanding of the role of banks as financial intermediaries, a modified use of digital technologies as well as a changing customer behaviour with new forms of interaction. Before analysing relevant changes in banking, the present chapter defines banking and outlines the customer structure of established banks and FinTech start-ups in Germany (Allen et al., 2010). Moreover, the influence of the financial and Covid-19 crisis on banking business models in Germany is highlighted and relevant changes in banking are critically analysed. Finally, the chapter summarizes the findings in literature and reveals current research gaps.

2.1 Definition of Banking

Generally, banking activities are classified in commercial banking, private banking, investment banking and asset management (Hellenkamp, 2018). Banks function as intermediaries between capital lenders and borrowers being of a high economic relevance hence equalising liquidity flows of international value chains generated by the production of real assets, goods, and cross-border trade (Allen et al., 2010).

Abbildung in dieser Leseprobe nicht enthalten

Source: Allen et al., 2010

As shown 'm figure 1, banks are positioned between lenders and borrowers thus financing and managing risks on both sides. When the liquidity equalisation of banks is interrupted and products or services are not paid, severe economic damages can arise (Hüfner, 2010). While Hellenkamp (2018) mentions that banks fulfil an important microeconomic function by offering private and corporate customers loans, deposit, and payment services, Wernz (2020) highlights the importance of banks for economic growth and wealth of nations as interface between investors and borrowers. Banks lend money from the central bank, other commercial banks, or private and commercial investors (Allen et al., 2010). While trust is crucial for depositors investing money in bank accounts, the bankruptcy of system-relevant banks during economic crisis should be avoided (Hartmann-Wendels et al., 2007). As a result, to examine the characteristics of banks in modern economies, it clearly needs to be differentiated between commercial and investment banks.

Commercial banks conduct maturity and risk transformation as financial intermediaries between capital supply and demand taking deposits and providing financing services to their customers generating new business (Allen et al., 2010). The revenue streams of commercial banks result from the interest margin paid for deposits and the interest rate charged for credits and loans (Hornuf et al., 2020). The amount of the interest margin depends on transaction risks and the customer rating (Hartmann-Wendels et al., 2007). However, Wernz (2020) highlights that aligning with the low interest policy of central banks worldwide the main source of income for commercial banks diminishes. Moreover, Hartmann-Wendels et al. (2007) outline that commercial banks' financing comprises consumer and corporate credits, real estate, and project financing. While the financing business represents the core of commercial banks' business models, they comprise a wide spectrum of associated products and services, e. g. instance payment, account, and investment services (Hellenkamp, 2018). In comparison, investment banks operate as financial intermediaries on the capital markets providing the trade of securities, bonds and derivatives and engaging in proprietary trading (Tolkmitt, 2007). Associated financial services of investment banks involve mergers and acquisitions, the issuance of securities, bonds and other debt and equity issues (Tolkmitt, 2007). The role of universal and commercial banks as financial intermediary between capital provider and capital acquirer is illustrated 'm figure 3.

Figure 3: Structure ofa financial intermediary

Abbildung in dieser Leseprobe nicht enthalten

Source: Hartmann-Wendels et al., 2007

While a general definition of banks does not exist, the framework of banking operations is constantly changing and highly dependent on external market dynamics (Hellenkamp, 2018). The German Banking Act (KWG) constitutes the mandatory law for domestic banks, branches and subsidiaries of foreign banks providing financial services in Germany (Hartmann-Wendels et al., 2007). Additionally, the law clearly differentiates between financial institutions and financial services companies. According to §1 KWG, financial institutions are defined as credit institutions offering credit banking services to customers (Altunbas et al., 2011). Typical credit banking services include bank accounts, investment brokerage, mortgages, financing, and leasing services. In contrast, financial services institutions are defined as companies providing banking-related services but need to be clearly separated from established banks (Hornuf et al., 2020). FinTech start-ups in general are commonly evaluated as financial services institutions by regulatory authorities in Germany (Wernz, 2020). However, some FinTech start-ups are considered as neo-banks and operate under partner's banking licenses or under an acquired electronic banking license (Kemperman et al., 2018). The following section concentrates on the different types of banks and the German banking market.

2.2 The German Banking System

Generally, the German banking system constitutes a universal banking system in which banks are allowed to provide banking, financing, and payment services to customers. Although some banks operate under limited banking licenses, the banking market can be divided into universal and specialist banks (Benston, 1994).

According to Wernz (2020) the German banking market is dominated by banks almost exclusively operating in the saving and lending business, e. g. district savings banks and cooperative banks. Moreover, Ostendorf (2013) highlights the relevance of special banks, car banks and thrifts on the German banking market. However, Kempermann et al. (2018) contradict this notion and emphasize that many thrifts are endangered by bankruptcy due to the low interest policy of central worldwide and shrinking interest margins. Additionally, Benston (1994) stress that many German banks can be defined as universal hence providing a wide range of financial products and services. While some district savings banks for example offer insurance policies or real estate services, these additional services of some German universal banks are neglected in the further examination (Hellenkamp, 2018). Aligning with the definition of banks as financial intermediaries between capital supply and demand of Allen et al. (2010), three distinct functions of capital markets are identified: capital allocation, coordination, andselection.

According to Kemperman et al. (2018), capital markets fulfil the role of capital allocation equalising the demand of capital between supply and demand. In this context, the heights of interests charged by banks inform market participants about the market demand and scarcity of capital. Furthermore, Basten and Mariathasan (2018) emphasize that capital markets fulfil a coordination function by providing a location for offer and demand for capital. Finally, Hellenkamp (2018) highlights that capital markets achieve a selection function with the opportunity to impose specific requirements on capital providers and parties seeking capital by limiting access.

However, Tolkmitt (2007) analyses that the European System of Central Banks (ESCB), the Single Supervisory Mechanism (SSM), the European Banking Authority (EBA) and the German central bank (Bundesbank) form the institutional regulatory basis of the German banking system. According to Hellenkamp (2018), the German Banking Act (Kreditwesengesetz) represents the legal basis for banks as financial institutions to operate on the German banking market. In addition, financial regulations of the German banking supervision (BaFin) further complement the regulatory framework (Hartmann-Wendels et al., 2007). While the German Banking Act (KWG) defines the services and tasks executed by universal banks, particularly the deposit and financing business are of a high relevance regarding the intermediary function (Altunbas et al., 2011). Moreover, the high volume of interest-based earnings in profit and loss accounts in comparison with commission-based financial investment services business is a further indicator for the high relevance of that business segment (Kemperman et al., 2018).

2.3 Types of Banks

Universal banks are distinguished in three distinct dimensions including commercial banks, public sector banks, credit cooperatives and their local subsidiaries (Deutsche Bundesbank, 2015). In comparison, specialised banks are differentiated between six distinct segments involving mortgage banks, building associations, investment management companies, securities depositories and banks with special tasks (Benston, 1994). Figure 4 illustrates the elements and institutions ofthe German banking market (Tolkmitt, 2007).

Figure 4: Elements of the German Banking System

Abbildung in dieser Leseprobe nicht enthalten

Source: Hellenkamp, 2018

Since the study focuses on the commercial banking system, the European System of Central Banks, the banking supervision, and banking associations are neglected. According to Hellenkamp (2018), the commercial banking system in Germany can be separated into universal banks and specialist banks. However, Deutsche Bundesbank (2015) contradicts differentiating between big banks, regional banks, credit banks and branches of foreign credit banks referring to the group of commercial banks. Moreover, Kemperman et al. (2018) highlight that the main difference between universal and specialised banks is that universal banks can conduct any financial business whereas specialised banks are only allowed to operate in specific market niches. Generally, Basten and Mariathasan (2018) analyse that the commercial banking system covers financial markets nationally and internationally operating profit oriented in market segments such as the securities business and investment banking alongside the deposit and loan business. Deutsche Bundesbank (2015) confirms that notion stressing that the business model of some public sector owned banks such as Landesbanken has become similar to that of big banks. While Tolkmitt (2007) observes that branch networks of commercial banks are commonly concentrated on rural areas, Hellenkamp (2018) identifies three distinct types of universal banks including credit banks, public banks and credit cooperatives. Fischer (2017) outlines that these types form the basis of the three-pillar system of the German banking market. Moreover, specialised banks are distinguished in mortgage banks, building societies and banks with special tasks (Altunbas et al., 2011).

According to Basten and Mariathasan (2018), the segment credit banks contains big banks, regional banks and branches of foreign banks. While these banks mostly operate as public limited companies profit oriented on the German banking market, some public and credit cooperatives started to enlarge their business activities competing with profit-oriented credit banks (Hellenkamp, 2018). Initially, the underlying business model of public banks was to focus on the financial support of local communities and the public sector instead of generating profit (Hartmann-Wendels et al., 2007). Wernz (2020) criticizes the modifying business operations of some public banks in Germany engaging in investment banking as risky and not meeting public interests. Fischer (2017) underlines this observation emphasizing that public banks were originally established to provide banking and financing services to the population and small and medium-sized companies instead of competing with private banks. Particularly the business model of some state banks changed during the last decade thus developing similarities to credit banks' business models (Hellenkamp, 2018). While distinct legal forms exist, most public banks operate as public financial institution on the German banking market (Fischer, 2017). Public banks perform an important function in the economy as state and municipal banks providing credits and loans to public institutions, organizations, and communities (Benston, 1994). Besides, public banks offer universal banking services to private-, corporate- and institutional clients (Kemperman et al., 2018). While saving banks act as public agencies on the German banking market, these banks conduct their business as universal banks with private, corporate, and institutional clients (Hellenkamp, 2018). Furthermore, credit cooperatives are universal banks with the central objective to support the cooperative society representing the owners of the bank (Wernz, 2020).

Although Kemperman et al. (2018) terminologically separates specialist banks from universal banks because oftheir specialised tasks, Deutsche Bundesbank (2015) finds that these banks purely provide limited financial services to customers. Moreover, Fischer (2017) mentions that mortgage banks, building societies and banks with special functions belong to the group of specialised banks. He defines mortgage banks as specialised credit banks offering long-term loans to mainly private clients. Hellenkamp (2018) confirms that definition outlining that the financial resources of mortgage banks mainly result from the emission of mortgage bonds being sold to private and corporate investors on capital markets.

According to Tolkmitt (2007), building societies are special banks offering real-estate financing and collective saving to private customers. When customers close building loan contracts, the building society receives deposits during the saving period. After the expiry of the saving period, customers obtain the right to demand for a loan to finance a house or a flat at pre-defined interest rates (Hellenkamp, 2018). According to Fischer (2017), banks with special tasks have often to fulfil special or supporting functions. For example, the main objective of guarantee banks belonging to the group of public banks is to provide credits and loans for small and middle-sized companies. While some of these companies with bad ratings are not financed by commercial banks, guarantee banks support small and medium-sized companies in financing (Tolkmit, 2007).

In addition, Hellenkamp (2018) highlights that guarantee banks are financed by public organizations and operate neutral in competition. Conclusively, guarantee banks receive securities from public organizations to secure risks when providing credits to small and medium-sized companies (Fischer, 2017). While banking associations form groups of national banks with common interests, these also represent the third pillar of the German banking system (Hellenkamp, 2018). The main objective of banking associations is to promote the interests of their members towards government agencies and regulatory authorities, finding common agreements on legal and technical standards in the financial industry and supporting members with financial expertise (Hellenkamp, 2018).

Furthermore, Kemperman et al. (2018) highlight that the efficiency of an economy is largely dependent on the banking and financial system. Therefore, efficient, and reliable banking authorities are required alongside strict framework conditions for the stable operation of banking businesses and controlling functions. Wernz (2020) finds that undesirable developments impairing the functions of the banking system must be prevented by banking authorities. Every organization providing financial services in Germany must adhere to national and international financial law. Fischer (2017) outlines that the national regulatory authority supervising financial institutions in Germany is represented by the Federal Financial Supervisory Authority (BaFin). In addition, Hellenkamp (2018) mentions that also insurers, pension funds and associated financial companies are supervised by this regulatory entity. Despite national regulatory authorities, the European Union assumes responsibility for the supervision offinancial organizations in cross-border subjects (Hellenkamp, 2018).

After the Euro crisis in 2011, a control system was installed on European level consisting of the European Systemic Risk Board (ESRB) and three European supervisory authorities including the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Market Authority (ESMA) (Fischer, 2017). The primary objective of these regulatory institutions is to analyse systematic risks and to monitor the financial stability giving recommendations to member states and the European Commission. Since 2014, the European Central Bank (ECB) is fully responsible for the supervision ofthe European banking sector (Hellenkamp, 2018).

To examine the characteristics of banking business models, Ayadi and de Groen (2014) differentiate banks between their earning structure, legal form and asset and liability structure. To start with the earning structure, balance sheets and income statements of banks are distinguished between profitability and risk profile (Wernz, 2020). According to Allen and Carletti (2010), banks operate in distinct legal forms on the German banking market including private commercial organisations, public sector organisations and cooperative organizations. Moreover, Kemperman et al. (2018) analyse that the asset and liability structure of banks is closely linked to their business activity. Conclusively, typical funding sources characterising the asset and liability structure of banks include retail, wholesale, and investment (Ayadi and de Groen, 2014). Figure 5 summarizes the distinct types of banking business models.

Abbildung in dieser Leseprobe nicht enthalten

Source: Ayadi and de Groen, 2014

After the financial crisis in 2008, many banks in Germany were confronted with profound challenges and changes: While Wernz (2020) analyses that banks specialised on deposit- financed lending were not largely affected by the financial crisis, Kemperman et al. (2018) find that particularly banks focused on investment banking and international financing struggled. Deutsche Bundesbank (2015) confirms that observation highlighting that particularly big banks and federal state banks in Germany needed financial help from the government. Fischer (2017) deducts this phenomenon to the fact that big banks and federal state banks had tremendously increased financial market exposures, interbank transactions, and investment banking activities before the financial crisis in 2008. Although these business divisions were more profitable than the traditional deposit and lending business, Rötheli (2010) critically concludes that expanded income structures led to higher volatility regarding earnings in the trading business thus entailing more risks in economic crisis (Kemperman et al., 2018). In conclusion, earnings in the trading business fell resulting in poor profitability thus huge bank bailout packages initialised by the government had to stabilize banks from systemic crashes (Hüfner, 2010).

2.4 Definition of FinTech and background

First, FinTech start-ups constitute a relatively new financial industry in Germany applying modern and innovative technologies to enhance the provision of financial services (Schueffel, 2017). According to Kroner (2017), the enabling technologies of FinTech include artificial intelligence, blockchain, cloud computing, data analytics and the Internet of things (loT). However, Leong and Sung (2018) criticize that any start-up with an innovative business idea improving financial service processes using modern technology is nowadays regarded and categorized as a FinTech. While Lee and Shin (2018) find that banking was evaluated as a traditional business model for a long time, advances in electronic finance, the low-interest policy of federal banks worldwide and the emergence of mobile technology modified the financial services industry since 2008. Moreover, Davis et al. (2009) confirm that notion stressing that the ongoing digitalization forces traditional market players to better adapt to structural and economic changes in financial business model. All in all, Lee and Shin (2018) summarize that the ability to adapt to innovations becomes increasingly important in technology-driven financial markets. Besides, Gimpel et al. (2018) stress that the implementation of digital structural changes is often accompanied by complex procedures highly impairing traditional business models with outdated IT infrastructures and missing IT competencies.

According to the World Economic Forum (2017), "FinTech" is a portmanteau for financial technology standing for "disruptive", "revolutionary" and used to describe how start-ups as new market entrants can "tear down" barriers of established incumbents. While a broad range of definitions for FinTech companies exist in the literature, Lee and Teo (2015) define FinTech to be the application of modern IT technology in the financial services industry making a product, service or improving the financial value or establishing an entirely new business model.

Furthermore, Stern et al. (2017) highlight that some FinTech start-ups are likely to make an impact on monetary stability, efficiency, safety, and stability of the financial system, particularly regarding small financial organizations such as e. g. rural banks in developing countries. While Dapp et al. (2014) confirm that notion and stress that many start-ups develop products and services using modern technology, they define FinTech companies as specifically addressing disruptions in financial services. In addition, King (2013) validates that FinTechs are often associated with start-ups which appears partially correct since Google or Apple provide payment transaction services to customers. However, Mello (2018) partly contradicts emphasizing that FinTech companies cannot be assigned to specific industries or business models. Nevertheless, the majority of FinTech start-ups provides services and products which were initially offered by incumbents. Conclusively, Mello's (2018) definition of FinTech also involves tech-companies such as Apple providing payment transaction services. All in all, each definition associates FinTech companies with distinct forms of technological innovations in the financial services industry. However, Paxmann and Roßbach (2015) confirm that thought underlining that FinTech is commonly used to describe innovative business models and the transformation from analogue to digital in the financial services industry.

In broader definitions, some scholars evaluate start-ups offering insurance or computer science-related financial services belonging to the group of FinTechs. While the latter group of FinTechs are not be considered throughout the present study, Dorfleitner and Hornuf (2016) emphasize that is it not possible to find a general definition for FinTech. In conclusion, the definition of Fintech remains vague thus a simplified approach is needed for the further examination. Therefore, the author defines FinTech as a collective term for financial technology describing technological processes in banking, investment or payment services, products, and associated business activities (Davis et al., 2009). While the main objective of FinTech start-ups as new market participants is to increase the customer value, competitive advantages of FinTechs in comparison with incumbents include a higher operability and efficiency, transparency, and automatization (Economist, 2015). In the financial industry, Mackenzie (2015) criticizes that typical customer pain points are often neglected or not fully covered by established banks.

Furthermore, FinTechs operating in Germany are divided into four distinct market segments dependant on the business model {figure 6). Consequently, the German FinTech market consists of the segments/inance, asset management, payment, and other financial services (Wolff-Martin, 2014). Firstly, the segment finance consists of FinTech companies that offer loans to private citizens and/or companies. Moreover, this segment is subdivided into FinTechs offering crowd-based services or direct loans or factory services without intermediaries to customers (Belleflamme et al., 2014). Crowd-based services include crowd investing, crowdlending and donated or rewarded crowdfunding. Crowdfunding represents a form of financing where a lot of supporters invest small amounts of money for a common objective. A crowdfunding start-up replaces the intermediary function of banks and acts as bridge between the supporters (crowd) and the initiator of a crowdfunding campaign (Klöhn and Hornuf, 2012). The four different types of crowdfunding campaigns are crowd investing, -lending, donated and rewarded crowdfunding (Davis et al., 2009).

Figure 6: FinTech Market Segmentation

Abbildung in dieser Leseprobe nicht enthalten

Source: Wolff-Martin, 2014

Secondly, the segment asset management consists of FinTechs offering consulting, investment, asset, and financial planning services to customers (King, 2013). According to Liu et al. (2014) social trading is a form of investing whereby investors adapt investment strategies of an investment community. Conclusively, individual investor can benefit from the common knowledge and expertise of the community (Liu et al., 2014). However, the social investing approach is partly criticized by King (2013) hence investment decisions made by communities are usually not always sophisticated and often emotional. In contrast, robo- advisors constitute passive-managed portfolio management systems and make investment decisions based on artificial intelligence for private investors (Hierl, 2017). Investment algorithms usually follow passive investment styles instead of active trading or value investing. Moreover, FinTech companies offering private financial planning to their customers often use mobile application-based services and analyse the spending and saving behaviour of their clients (Dapp, 2015).

Thirdly, the market segment payment service characterises FinTech companies whose products and services provide cross-border payment transactions (Dorfleitner and Hornuf, 2016). While Böhme et al. (2015) highlight that alternative payment methods use modern blockchain technology to transfer money worldwide, Hierl (2017) estimate that the technology behind the cryptocurrency Bitcoin, the blockchain, has the potential to disrupt the financial services industry. In contrast, Böhme et al. (2015) criticize that the disadvantages of cryptocurrencies are the high volatility and low acceptance rates in everyday life. Fourthly, the market segment other FinTechs describes FinTech companies which are not assigned to traditional banking functionalities including financing, asset management and payment services. While FinTech companies providing insurance services are assigned to the sub­segment insurance services, these FinTechs are defined as InsureTechs (Wolff-Martin, 2014). The volume of the FinTech market segments crowdfunding, loans and factoring, social trading, robot-advice, asset management and payment services includes over 2.2 billion euros (Wolff-Martin, 2014).

Furthermore, Böhme et al. (2015) stress that the transaction volumes in the market segment payment services with 17 billion euros and more than 1,2 million active customers considerably increased. According to Dorfleitner and Hornuf (2020), the German FinTech market comprised of 694 FinTech companies in 2019. In comparison with 2018, this represents an increase of approximately 60% growth in one year. While figure 7 illustrates the proportional division of the FinTech market in Germany, it becomes apparent that the majority of FinTechs operates either in the financing or asset management segment (Hierl, 2017). Since most FinTech start-ups generates operative losses, Dorfleitner and Hornuf (2020) analysed that from 694 FinTech companies in 2018 roughly about 550 existed at the end of 2019. As a result, many young FinTech companies are forced to close strategic partnerships and joint ventures with better-capitalized financial services companies (Böhme et al., 2015).

Figure 7: Number of FinTech start-ups in Germany

Abbildung in dieser Leseprobe nicht enthalten

Moreover, many FinTechs either merge with other FinTechs or are acquired by larger companies. While the number of FinTechs in Germany slightly increased over time, Haddad and Hornuf (2016) evaluate the Brexit to be one driver for the German FinTech market since many FinTechs leave the United Kingdom due to regulatory uncertainties. Furthermore, the costs of relocation are generally lower for young FinTech companies than for established banks (Davis et al., 2009). However, the costs of relocation for start-ups during the founding phase can also threaten the existence. One further challenge for FinTech companies is the process of identifying and authorizing customers. While usually the product selling process takes place online, start-ups are interested in authorizing and selling financial products and services without interferences (Rasche and Tiberius, 2017). Consequently, unclear legal conditions impairthe online-based business models of many FinTechs in the UK. In conclusion, the enacting of the Payment Services Directive 2015/2366/EU from the European Parliament facilitated the market situation for most FinTechs in the European Union representing one primary reason for FinTech start-ups to leave the UK (Geiger, 2016).

2.5 Modern and open banking

First, the section analyses the repositioning of German banks during the ongoing digitization. Before the term open banking is defined in the context of financial technology, open banking products are critically analysed and an overview on the emergence and development of electronic banking is given (Bramberger, 2019). Undoubtedly, fundamental changes currently take place in the private and corporate banking customer segment on the European payment transaction market. Furthermore, Eckrich and Jung (2016) find that the current financial market development is characterised by extreme dynamics, high volatilities, and uncertainties due to the Covid-19 pandemic and the rising level of debt of nations worldwide. In this context, Barrie et al. (2016) analyse that new technologies and market entrants such as third-party payment service providers, fundamental changes within the legal framework, and a thriving customer behaviour evoke a sustainable shift away from traditional banking to fully digitized and highly autonomous banking services.

According to Bramberger (2019) prospective modifications on the supply side of banks are likely to impact the future mix of payment methods such as the replacement of cash and card payment transactions. New market entrants such as account information service providers (AISPs) and payment initiation service providers (PISPs) demonstrate a higher "disruptive potential" while both encourage innovative activity on financial markets. Furthermore, Hierl (2017) confirm that notion and emphasize that changes in legislation and technology will force market incumbents to rethink their strategy towards future payments markets. Thus, new technologies force existing players to consolidate hence legislation and customer behaviour changes. As a result, payment processes become integrated products and established market players need to differentiate existing product portfolios better to maximize earnings (Rasche and Tiberius, 2017).

Although the value chain in EU payment transactions is largely dominated and controlled by banking institutions, Riedl (2002) emphasizes that that the distribution of earnings in payment transactions is likely to change in near future. Moreover, he argues that modern technologies lower transaction costs of single processes thus contributing to a massive split in the value chain. As part of the disintermediation process, distinct levels of payment transactions are already completed by providers without banking license (Rasche and Tiberius, 2017). However, advantages in competition for non-banking actors are only created when these achieve a comparative advantage over banking institutions regarding the respective sub­process performance (Riedl, 2002). Since many non-banks, such as third-party providers, started providing innovative and digital payment user interfaces to customers, the market position of many established banks weakly fulfilling the original bank function is heavily under pressure. In conclusion, Bramberger (2019) highlights that banks are confronted with a very strong disintermediation pressure.

In addition, Moormann et al. (2016) distinguishes six stages from the payment initiation to the final payment transmission. Payment systems use agreements and technical standards to ensure that these steps are handled securely and reliably between all participants in a payment system. Although all six phases constitute the framework for payment processes, the financial value chain is embedded in further business and handling processes before and after customers make payments (Moormann et al., 2016). Moreover, Bramberger (2019) highlights that current trends and on-going changes in banking on the supply side are likely to make an impact on the mix of payment methods with respect to the growth in A2A payment transactions and the replacement ofcash and card payment transactions. New providers such as account information service providers (AISPs) and payment initiation service providers (PISPs) foster financial innovations and exploit the "disruptive potential" of digital mobile devices (Haddad and Hornuf, 2016).

Figure 8: Sub-processes ofthe payment process

Abbildung in dieser Leseprobe nicht enthalten

Source: Haddad and Hornuf, 2016

While Eckrich and Jung (2016) mention that open banking became increasingly common since the Euro crisis, they define the term as portmanteau for banks open towards innovation and financial technology. According to Bramberger (2019), the ambition of banks to open the financial value chain is to become the “first mover" outside the core business, since this offer the chance for financial organizations to enter new market segments. On the contrary, the open banking approach is party criticized by Kipker and Veil (2003) hence strategic changes in business models always bear the risk of attracting new competitors and loosing focus from the core business.

3 Methodology

First, the methodology of research is largely influenced by the research philosophy subscribed to, the research strategy applied, and the research instruments utilized when exploring solutions to distinct research question and objectives.

3.1 Research methodology and justification of approach

The primary objective of the present chapter is to critically discuss the research approach and to justify the research strategy and methodologies adopted. In addition, the research philosophy is critically examined and compared to other philosophies. The author describes the research strategy, the research approach, the methods of data collection, justifies the selection of the sample, the research process, the type of data analysis and examines the ethical considerations and limitations of the entire research project (Bell, 2005). While the research conducted represents a rather qualitative than quantitative approach, distinct pieces of previous academic research exist concerning the emergence and role of FinTech companies in the financial services industry in Germany (Miles and Huberman, 1994). These not only discuss different business models of FinTech start-ups but also partly assess the impact and innovative strengths of these companies. Since the FinTech industry in Germany constitutes a young and thriving industry, existing research lacks depth and long-term experiences (Dorfleitner and Hornuf, 2020). In consequence, the proposed research tries to identify and complement existing research gaps. As such, the conducted research constitutes a new form of research but on an already existing research subject (Miles and Huberman, 1994).

While Galliers (1991), Alavi and Carlson (1992) identify a significant number of research methodologies, Pervan (1994) groups these in three distinct levels distinguishing between eighteen categories. The following table systematically summarizes these research methodologies and suggests whether their approach is of a rather scientific and positivist nature or an interpretivist and anti - positivist nature. Before the approach applied in the present paper is introduced, relevant key characteristics and strengths and weaknesses of distinct methodologies are briefly evaluated.


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Impact and effects of innovations in the financial industry in Germany
An empirical analysis
University of Warwick  (Warwick Manufacturing Group)
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ISBN (eBook)
ISBN (Book)
FinTech, Innovation
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Master of Arts Tobias Brinkmann (Author), 2021, Impact and effects of innovations in the financial industry in Germany, Munich, GRIN Verlag,


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