Regulatory requirements and the 5 most important steps for starting a fintech company in Germany

If there is one sector that seems to have weathered the economic and health crisis without any major problems, it is the fintech industry. The proof: in 2021, European fintechs raised no less than €125 billion in investment (2.8 times more than in 2020)!

Since 2015 and the introduction of the second Payment Services Directive (PSD2) by the European Union, the financial landscape and the world of financial players have changed enormously. With the advent of open banking, entrepreneurs have benefited from a regulatory framework that is particularly conducive to the creation of fintech companies, including in Germany. Startups combine a high degree of innovation with service offerings in one or more financial areas.

Regardless of this, regulatory requirements are among the biggest challenges for fintech startups, but they also offer clear potential benefits in terms of innovation and competitive advantages. We shed light on this sensitive issue here and then reveal the five most important steps to get your fintech off the ground!

What regulations you should be aware of when founding a fintech company

A proactive understanding of regulatory requirements is not only a prerequisite for fintechs to avoid stumbling blocks, but also a means of building trust with customers and investors.

• PSD2 & open banking: The PSD2 Payment Services Directive has revolutionized the financial sector by requiring banks to open their nodes and interfaces (APIs) to third-party providers. This enables fintechs to develop new business models and cooperation opportunities.
• DORA & IT security: The new EU regulation on digital operational resilience in the financial sector (DORA) further tightens IT security standards for financial service providers. Startups that integrate compliance and security into their processes from the outset can secure a competitive advantage.
• Licensing & compliance: The choice between obtaining your own license or working with a BaaS provider such as Treezor can determine your market success. Having your own banking license certainly allows for independence, but it requires high investments and compliance with strict requirements

#1 Define a clear offering

Like all companies, the fintech industry cannot escape the basic rules of strategic management. Defining a business model, targeting marketing personas, conducting market research and developing a business plan are important building blocks for an innovative product or service. For a successful product launch, it is helpful to follow the necessary steps that are taken in most entrepreneurial projects.

Is your product or service intended for a B2C, B2B or B2B2C target group? What place will you occupy in your industry’s value chain? These are questions you need to answer before you get started!

What sets this apart from other business projects is that you want to become active in the financing and payment sector with the services or products you offer. You should therefore make sure that you create as clear a diagram as possible for each investment in order to clearly visualize the financial flows involved. This diagram will help you make technical and regulatory decisions, but also better understand the scope of your offering.

#2 Do you comply with legal requirements?

If there is one regulated sector, it is the financial services sector!

If your fintech startup involves the management of financial flows, you have three options:

• Act as an agent through an authorized financial institution, such as Treezor
• Become an authorized payment institution (in Germany, the Federal Financial Supervisory Authority (BaFin) is responsible for issuing licenses)
• Submit an application for exemption (to BaFin)

So why choose one solution over another? Here are three important questions to help you choose the best management option for a successful fintech company.

a. Am I in a hurry?

You should be aware that applying for a payment services license is a lengthy and time-consuming process. After submitting the application, the local supervisory authority (BaFin) has three months to decide whether to approve or reject the application. Therefore, if you decide to apply for your own payment services license, you should allow a good year for compiling the documents and completing the entire process.

If you don’t want to wait that long, you can also contact an authorized payment or e-money institution (e.g., Treezor) that has already taken these steps in advance and to which you can delegate the regulatory requirements.

b. Do I have internal resources available to ensure my compliance?

Payment and e-money institutions are subject to several regulatory requirements, including PSD2 (strong authentication), anti-money laundering and counter-terrorist financing (AML), KYC and KYB procedures (Know Your Customer and Know Your Business for customer identification), the General Data Protection Regulation (GDPR) and mandatory reporting to supervisory authorities (including BaFin, EBA, Deutsche Bundesbank, ECB, etc.)

All these regulatory requirements demand expertise and resources that a young fintech company usually does not have when it starts up. In addition, when launching a new project, it is better to secure its “time to market.” All these are reasons to become an agent of an e-money or payment institution rather than a payment institution yourself.

c. Is my project internationally oriented?

Wenn es Ihr Ziel ist, mit Ihrem Fintech ins Ausland zu expandieren, sollten Sie wissen, dass Sie stets eine Genehmigung beantragen müssen, um in jedem Land, in dem Sie sich niederlassen, tätig sein zu können. Das „Passporting“-System der EU (auch als „Europäischer Pass“ bezeichnet) ermöglicht es Unternehmen, die in einem Mitgliedstaat der EU oder der EWR zugelassen sind, mit minimalen zusätzlichen Genehmigungsanforderungen in anderen Ländern frei zu handeln. Wenn Sie Treezor beauftragen, profitieren Sie von Treezors erweiterter Lizenz. Treezor hat die Möglichkeit, im Namen seiner Kunden (“Agenten”) in 25 Ländern tätig zu sein. Somit müssen Sie sich nicht um die länderspezifischen Formalitäten kümmern.

#3 Choose your best tech allies carefully

The democratization of APIs, i.e., interfaces that allow two computer systems to communicate with each other, has not left the banking sector untouched. Treezor’s Banking-as-a-Service solutions offer a range of APIs that provide access to the functions of a banking system (core banking): account opening and management, KYC, issuance of payment instruments, receipt/issuance of transactions (checks, card transactions, transfers and direct debits).

This means you no longer need time-consuming technical developments, because others have already done that for you! By choosing a BaaS provider such as Treezor, you can significantly reduce your time to market—as successful fintechs such as Lydia, Pixpay, Swile and Shine have done before you, some of which have even become technology unicorns.

#4 Finding financing: the be-all and end-all

If you are launching an ambitious project, you will quickly need capital (to acquire users, hire talent, expand internationally, etc.)

Fortunately, there are now a variety of ways to finance your growth, whether you need a few thousand or a few million euros:

• The “love money” lent to you by your relatives
• A bank loan granted to you by your bank (or other banks)
• Regional or public subsidies (especially via KfW)
• Raising capital from investors such as business angels and investment funds
• Crowdfunding (100% online, of course)

Scaling strategies for growing fintechs

The “financial phase” is followed by the next stage in the life of your newly founded fintech: scaling. But the faster the growth, the greater the potential challenges. Our tips will help you ensure sustainable success:

• International expansion: The fintech sector is global, and expanding into new markets can unlock growth potential. Thanks to regulated BaaS providers, companies can roll out their financial services in different countries in a timely manner.
• Optimized user experience: Fintechs in the expansion phase rely on personalized services and seamless digital experiences to strengthen customer loyalty. AI-supported recommendations or open banking integrations can help with this.
• Maintaining flexibility: Fast-growing fintechs should keep an eye on their licensing strategy. Should they stick with the BaaS model or acquire their own license to operate more independently?
• Partnerships as growth drivers: Collaborations with established financial institutions, insurtechs or open banking platforms offer access to new target groups and technological synergies.

#5 Put together the right team and take advantage of tips from like-minded people

After a long period of investors judging projects solely on product/market fit, the ambitions of project sponsors are now increasingly being analyzed using another criterion: founder/market fit.

In the pre-seed, seed or Series A phase, early investors have little data to look at. They therefore tend to focus on other criteria, such as the profile of the founding members, their professional background and their ability to understand the specifics of the market they are entering. Two similar ideas can be implemented very differently, depending on the execution quality of the founders and the first employees.

Be careful: while you should get along well with your partners, you should also avoid putting together a team of clones with similar profiles or redundant (digital) skills.

The current fintech market in Germany and Europe

The fintech ecosystem is no longer confined to London and the US—the boom also appears unstoppable in Berlin and elsewhere in Europe. In Germany alone, there are over 900 fintech companies covering various financial areas such as digital payments, credit business, investment management and other financial services. In Europe, regulatory initiatives such as PSD2 and DORA are promoting innovation in the industry and facilitating market entry for new providers. At the same time, demand for digital financial solutions is rising steadily, opening up a wide range of growth opportunities for fintechs.

What are the drivers of innovation in the fintech sector?

Fintechs are setting off a sensational dynamic in the financial industry, whether through disruptive financial technology or highly customer-oriented online banking solutions, almost always combined with a state-of-the-art app. The following areas are currently experiencing particularly strong growth:

• Digital payments: Modern payment solutions that enable fast and secure transactions and complement traditional payment methods.
• Alternative credit models: P2P loans and buy-now-pay-later (BNPL) are becoming increasingly important.
• Wealthtech & Robo-Advisory: AI-based investment solutions that enable personalized investment strategies.
• Insurtech: New business models in the insurance sector that offer digital processes and data-based policies.

Conclusion: Diversity is the best way to get your fintech company off to a flying start

As the McKinsey report “The link between diversity and business success is clearer than ever” recently showed, diversity is a factor in the performance of any company. So be careful not to focus too much on yourself, or you may lack resilience and creativity: two advantages that are particularly useful if you hope to make a breakthrough in the ultra-competitive world of fintech companies.

 With 93% men and only 7% women on the founding side of the fintech ecosystem, there seems to be a long way to go, but with this article, it’s now up to you to start something new with your next fintech company in Germany!