(Bloomberg) -- It's an October night in Frankfurt's Bornheim district -- dubbed the “merry village” for its plethora of 19th-century alehouses and applewine taverns -- and more than 100 techies and bankers have gathered in an airy loft for a more sober pursuit: debt financing for fintech startups.
Just a mile from the iconic bull and bear statues guarding the city's bourse, the enthusiasts are debating strategies at the Fintech Hub, a two-floor office space in Bornheim's Sandweg created by exchange operator Deutsche Boerse AG. The sleek venue with skyline views is one of several fintech nests sprouting up across Continental Europe's financial capital, which is racing to catch up with bigger centers from London to Singapore in the digital revolution upending traditional banking and commerce.
Shortages in venture-capital funding have led Germany's banking and exchange powerhouses to set change into motion themselves. Deutsche Bank AG has invited companies to join the Digital Factory, where it's building new mobile products, while rival Commerzbank AG is funding 11 fintech startups through its Main Incubator and CommerzVentures programs. In a separate project, the city of Frankfurt, state of Hesse and private industry are backing the Tech Quarters, to be housed in a high-rise near the fairgrounds and set to open Nov. 17.
“In Germany, you build your own accelerator because you don't have many choices,” said Oliver Bussmann, founder and managing partner of fintech consultancy Bussmann Advisory and a former chief information officer at UBS Group AG and SAP SE. “There's competition out there to build an ecosystem of startups, banks, universities and regulators -- if you can do this you can change the industry.”
Technology ‘Sandboxes'
German fintechs could benefit from more technology “sandboxes” for testing software in a safe environment with banking regulators' cooperation, said Bussmann, who introduced Blockchain digital ledger software at UBS. He's also credited with modernizing the bank's information technology system before departing earlier this year.
Europe's biggest banks are increasingly tapping into startups to aid the development of digital services and products to retain clients and stave off competitors. Technology that's changing how customers can get loans and pay bills is reducing the need for costly branches, adding to pressures on Deutsche Bank and Commerzbank, which are grappling with the squeeze from record-low interest rates in the region's most-competitive market.
Ranks Second
Germany ranks second for fintechs in Europe behind the U.K., drawing 524 million euros ($582 million) in investment funding last year. That compares with 707 million euros in the U.K., where the market is almost four times the size, according to a March study by Ernst & Young LLP.
While venture-capital investment in fintech companies dropped globally in the second quarter, according to an Aug. 19 study by KPMG and CB Insights, it rose in Germany to $186 million from $107 million in the first three months, surpassing the U.K.
Yet, Frankfurt scored lower than London and Singapore in a Deloitte study of fintech hubs in September that analyzed locations on their propensity for growth in the industry.
“I don't see many successful fintechs in Frankfurt yet,” said Eric Leupold, Deutsche Boerse's department head for pre-IPO companies. “If we succeed in making Frankfurt a fintech headquarters, we also profit from that.”
Early Stage
Berlin, a hive for startups in Germany, has proven a better hunting ground for early-stage venture capital than Frankfurt, Leupold said, adding that the biggest gap is with funding rounds of 10 million euros or more. “That's why we started the Venture Network for these larger startups,” he said.
Boston Consulting Group noted in an October report that fintechs backed by established institutions attract more funding and “mature more quickly” than those backed solely by venture-capital firms. In 2016, the average funding for industry-backed fintechs was $24 million, compared with $11 million for pure VC-backed startups, BCG said.
At a cost of less than 500,000 euros a year to Deutsche Boerse, the Fintech Hub offers free office space to a handful of selected startups including Fintura, which helps medium-sized companies shop for credit financing, and Cashlink, which arranges person-to-person payments via a smartphone app.
The exchange operator, which is trying to acquire London Stock Exchange Group Plc, has also dug deeper in its pursuit of cutting-edge technologies, buying currency trading platform 360T last year for 725 million euros.
Scout Ideas
Deutsche Bank counts Figo and Deposit Solutions among the most promising partners it's working with to build new digital products. It plans to double the development team at the Digital Factory to 800 by 2018 and has struck a partnership with Massachusetts Institute of Technology to foster new ideas.
Main Incubator, open since 2014, helps Commerzbank scout ideas, invest in startups like employee-compensation platform OptioPay, which it can offer its own customers, and get access to technology it can use to build new products, said Christian Hoppe, head of the program.
For fintech startups younger than three years old and seeking less than 5 million euros in funding, getting access to bank debt financing can be difficult, he said. “There is a gap and Main Incubator tries to help here,” said Hoppe. “Mostly you need venture debt investors.”
Still, Frankfurt's fintech incubators are minnows compared with London, where the Level 39 fintech accelerator spreads across three floors in Canary Wharf, connecting startups with new clients, large corporations and regulators.
Singapore's central bank is backing plans to open that city's Lattice80 fintech hub this month. Sydney, Australia's Stone & Chalk fintech space hosts about 70 startups and is backed by companies including Oracle Corp., American Express Co. and HSBC Holdings Plc. Closer to home in Zurich, the Digital Switzerland industry group operates the Kickstart accelerator for backed by Credit Suisse Group AG, UBS and Swisscom AG.
“We need young talent,” said Deutsche Boerse's Leupold. “If they think Frankfurt isn't just the tie-wearers but there are also young and cool people there, then Bornheim is a great place.”
To contact the reporter on this story: Aaron Ricadela in Frankfurt at aricadela@bloomberg.net. To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net, Nate Lanxon at nlanxon@bloomberg.net.
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