Why do so many FinTechs fail
More and more German FinTechs are giving up
The German FinTech industry is booming. But despite ongoing investments, more than 230 financial start-ups have failed since 2011, three quarters of them since the beginning of 2017. It is becoming more difficult for banks to choose cooperation partners.
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While individual FinTech start-ups are growing rapidly, many others often give up unnoticed. A current analysis by the auditing and consulting company PwC shows that a total of 233 German financial start-ups have ceased business since 2011. In addition, industry experts are observing an increasing number of so-called “zombie FinTechs” that only exist as a corporate shell, but de facto no longer develop any activities on the market.
While only a few FinTechs had disappeared by 2017, the number of business hires rose sharply to 62 two years ago. The following year, 74 FinTechs disappeared, and this year there were 34 by the end of May - more than ever before. PwC estimates that another 48 FinTechs will be giving up by the end of 2019.
The business settings of FinTechs are also relevant for banks and savings banks. They need to know what to look out for when working together. Because nobody wants to lose their partner, especially not after a short time. And the increase in cooperations shows that fewer and fewer banks seem to get along without FinTech when processes are to be modernized or new products are to be brought to market quickly.
The darn fourth year
One of the most common reasons for failure is that the start-up is running out of air financially. On average, financial start-ups that cease business are almost four years old. Accordingly, the wave of closings that has been observed for a good two years now also seems to be a consequence of the euphoria in start-ups in 2015 and 2016.
Most FinTechs fail in their fourth year of existence
This effect can also be derived from the geographical distribution of the closings: the FinTechs that disappeared were based in the places where a particularly large number of them were recently founded - i.e. in the FinTech capital Berlin (74). It is followed almost equally by Munich (25), Hamburg (21) and Frankfurt (20).
Smarter FinTechs and the business model
The chosen business model was not recognizable as a significant reason for the failure: 48 percent of the failed FinTechs aimed their services directly at the end consumer. 44 percent pursued a B2B business model, with 8 percent no clear assignment to one of the two categories was possible.
The segment distribution is more likely to provide clues: 70 of the failed FinTechs were active in the area of "financing", while 53 were so-called PropTechs (i.e. financial start-ups related to the real estate industry). This is followed by payment companies (29) and the start-ups from the insurance sector (22), which are known in technical jargon as InsurTechs. In the investment segment - which includes, for example, so-called robo-advisors - the study recorded 20 business settings. Eleven FinTechs that had disappeared had specialized in Bitcoin or blockchain services.
Age and funding are critical success criteria
No general predictions can be derived from the numbers as to which FinTechs will fail and which will not. However, one or the other interesting pattern can be seen.
The increase in bankruptcies in 2017 indicates, for example, that among the failed companies are many me-too FinTechs who wanted to jump on the bandwagon at some point in 2013 or 2014 and then had to find out that there are already competitors in their segment who are simply got there earlier or had better deals.
The slight majority in the B2C segment suggests that many FinTechs underestimated the cost of customer acquisition.
If a start-up has been in existence for more than five years, this indicates that it has successfully demonstrated its sustainability.
A venture capital firm had demonstrably invested in only 11 percent of the FinTechs that had disappeared. Accordingly, the examination of who has invested how much in FinTech also seems to be an important indicator for a promising cooperation.
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