DACH Region – Global Leader in Fintech
The DACH region, comprising of Germany, Austria and Switzerland, has long been a leader in the European fintech space. Since the beginning, these countries have been early supporters of the technology, creating one of the most vibrant and dynamic fintech ecosystems in the world.
This early, steadfast support has enabled the region to become a hotbed of innovation, allowing startups and established financial institutions to collaborate and create groundbreaking solutions that are making a difference on a global scale. With the development of cutting-edge technologies like blockchain, AI, cloud computing and more, the DACH region is poised to be a leader in fintech for years to come.
In 2021, Findexable, a leading fintech research and analytics firm, released its 2021 Global Fintech Ranking. The Ranking considered a location’s density of fintech companies and accelerators, payments ecosystems and the ease of doing business. With a high score in all categories, Switzerland was named the fifth biggest fintech hub in the world, with Germany taking the 9th spot. Furthermore, the Ranking placed Berlin, Zurich and Hamburg among the world’s top 30 most prominent fintech cities, ahead of major cities such as Seoul, Paris, Dubai and Shenzhen. This ranking highlights the strength of the fintech industry in Switzerland and Germany and its potential for growth.
A QUIET REVOLUTION, Findexable
“DACH nations boast exceptional technical infrastructure and human capital. From plentiful software developers to the highest level of patent applications in Europe” findexable 2022”
A new August 2022 report by the research firm in collaboration with German software-as-a-service (SaaS) cloud banking platform Mambu has highlighted the growth of the fintech industry in the DACH region. This growth has been made possible due to the high level of technical infrastructure in the region, coupled with its talented human capital, as well as the long-standing banking and asset management industries. These have provided both access to capital, as well as customer bases and problems to solve.
The wide range of resources offered by the DACH region have enabled fintechs to develop innovative solutions that can address the needs of the financial services industry. This has led to the emergence of a thriving fintech ecosystem in the region, with numerous companies making their mark in the industry.
Despite making up only 13% of Europe’s population, the DACH region (Germany, Austria, and Switzerland) comprises 20% of the software developers in Europe, according to Findexable’s recent report ‘A QUIET REVOLUTION’. This is especially impressive when considering that Germany alone boasts twice as many patent applications annually than any other country in the region.
In 2022, the DACH region’s fintech ecosystem experienced substantial growth and maturation, driven by consumer adoption, robust fintech funding activity, and a heightened interest in strategic investments.
This year, industry experts and onlookers expect to see novel developments in rapidly emerging fields such as climate/green fintech, an increase in merger and acquisition (M&A) transactions, and an escalating need for embedded financial solutions.
Fintech VC Funding Remains Strong
Despite a general pullback in venture capital (VC) investments, fintech dealmaking in the DACH region remained high and 2022 ended strong, with 191 deals worth approximately EUR 3.2 billion. This figure was lower than 2021’s 230 deals, which totalled EUR 4.5 billion, but it still accounted for 9.2% of deal value and 7.5% of all rounds across Germany, Switzerland, Austria, and Liechtenstein.
For most banks, investing in a fintech company was a way to gain access to new technology (35%) or enter new markets and business models (30%). The most sought-after capabilities included digital distribution (26%), blockchain and cryptocurrencies (22%), and data analytics (18%). Overall, the fintech sector in the DACH region remained strong despite the dip in VC investments and had its second-best year to date in 2022.
Investors have identified wealthtech and blockchain/cryptocurrency as the most appealing sectors within the fintech industry due to minimal capital investment requirements and promising profit margins.
What are Investors Looking for in 2023
After analysing fintech funding trends observed in the DACH region last year, PricewaterhouseCoopers (PwC) anticipates that deal flow in this region will remain steady or even increase in 2023. Additionally, PwC expects to see a rise in mergers and acquisitions (M&A) transactions.
Digital Payments Demand on Growth Trajectory
In 2023, the trend towards digital payments looks set to continue as consumers become increasingly comfortable with the idea of using contactless and mobile payments, while merchants embrace these payment methods to better serve their customers.
Digital payments in the DACH region have also seen a rapid increase, with contactless payment adoption rising from 40% in June 2019 to 77% in Germany, 82% in Austria, and 80% in Switzerland as of September 2021. Consumers are becoming more comfortable with contactless and mobile payments, while merchants are embracing these payment methods to better serve their customers. The Finexable and Mambu report of 2022 noted that the rise of e-commerce in DACH has fuelled the digital payment industry.
Crypto under Regulatory Scrutiny
Meanwhile, the crypto industry faced a difficult year in 2022, but Magda Posluszny, senior associate at Lakestar, predicts that 2023 will mark the end of ungoverned crypto markets.
The DACH region is home to some of the most dynamic crypto and blockchain ecosystems, with Switzerland’s canton of Zug nicknamed ‘Crypto Valley’ and the Swiss city of Lugano having announced plans to adopt cryptocurrencies.
Germany is considered one of the world’s pioneers in blockchain technology adoption, and hosts the European Commission’s EU Blockchain Observatory and Forum, which estimates that it is home to more than 340 blockchain solution providers and startups.
In Austria, the industry has grown considerably over the past years, with Bitpanda becoming the country’s first and only fintech unicorn startup. The Austrian government has further shown interest in blockchain and digital currencies by launching a research project to examine tokenization and central bank digital currencies (CBDCs).
Baas > Backend-as-a-Service to Meet Compliance Demands
“Fintech companies are increasingly reliant on their BaaS providers to speed up time to market, boost revenues, and meet compliance demands,” Heathfield-Lee said. “However, as fintech companies scale and look to offer more complex services, many BaaS providers are struggling to keep up with this demand. This is resulting in lost revenues, significant resource requirements, rising costs, and at worst intervention from the regulator.
“Because of these issues, we’re seeing an appetite from across Europe for embedded banking as it’s more than just licensing, it’s the ability to create fit-for-purpose, targeted services supported by an API-enabled technology infrastructure in full compliance with regulatory requirements.”
Climate Fintech > Continued Investors’ Appetite
In 2022, funding to climate fintech companies reached a record high of US$2.9 billion, according to data from CommerzVentures. This sum more than doubled the amount raised in 2021 (US$1.2 billion), demonstrating a rapid increase in investor appetite for the emerging sector. This momentum is expected to continue in 2023 as the climate crisis leads to new use cases and subsectors, such as biodiversity and natural capital, gaining traction.
Paul Morgenthaler, managing partner at CommerzVentures, commented that there are “interesting new approaches for investing in natural capital and preserving biodiversity” which are similar to those employed in the carbon offsetting space.
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