With its large and stable economy, a triple A-ranking, as well as its ideal location in the heart of Europe, Germany offers a great financial infrastructure for investment opportunities. This article takes a closer look at the structure of the German financial sector, opportunities and challenges, the financial centre in Frankfurt as well the Brexit implications. If you would like to read about FinTech specifically, you can find our FinTech industry overview here.
The Industry at a Glance
According to the BaFin, short for Federal Financial Supervisory Authority, the German financial industry currently consists of 1.647 credit institutions, among 270 of them are private banks, 1.275 financial services institutions, 562 capital management companies, 248 insurance companies as well as 82 payment and e-money institutions.
Due to the high economic attractiveness, its international reputation and the access to the European Union (EU) single market and its 400 million consumers, the financial industry continues to attract talent and investment from Germany and abroad. In Germany, 3% of all employees, around 1 million people, work in the financial and insurance services sector.
Frankfurt – Germany’s Financial Centre
Frankfurt’s renowned financial hub connects German, European and international institutions. Especially, with the European Central Bank (EZB) being located in Frankfurt in close proximity to more than 200 domestic and international banks, the German stock exchange AG, branches of other foreign central banks, the BaFin, as well as an industry network of consulting and financial services companies, investment, accountancy and law firms.
Moreover, Frankfurt is a centre for research and academic institutions. Next to the Goethe University, which includes the House of Finance and the Leibniz Institute for Financial Research, and the private Frankfurt School of Finance and Management, there are 30 other higher education institutions within a range of 100km.
According to Germany Trade and Invest, more than 100.000 people from the Rhine-Main region around Frankfurt are working in the financial sector and more than 20.000 students from that area are striving to enter the industry with a degree in economics, IT or business.
Likewise, industry associations such as the Association of Representative Offices of Foreign Banks in Germany e.V., the German Institute of Stocks e.V. or the Federal Association of Investment and Asset-Management are located in Frankfurt. Additionally, the most important networking events of the sector such as the “Euro Finance Week”, the “Frankfurt Finance Summit” and the “International Frankfurt Banking Evening” are held in the financial capital of Germany.
Challenges and Opportunities
Next to the impact of low interest rates and changes in terms of consumer buying behavior, the most important challenge that the financial sector is facing is the process of digitalisation. However, these challenges are also presenting business opportunities for the banking industry if their services are adapted to changing consumer demands.
1. Regulatory Framework
The decline of interest rates and as a result a decrease in the overall lending margin has been challenging banks over the past years. In the long run, these developments can affect the profitability of German financial institutions. Next, the regulatory framework by the European Central Bank mandates high capital requirements which are adding pressure for lending banks that are already suffering from low-interest rates over the past years. Hence, banks must find creative ways to cut costs and boost profitability.
2. Cost Reduction through Innovation
Financial institutions aim to reduce their costs to increase their profitability through various methods. For instance, industry experts advise the sector to leverage the opportunities offered by new technologies which would eventually lead to more cost-efficient processes. Within a few years, artificial intelligence (AI) has the potential to massively change the financial industry by, for example. taking over the assessment and processing of credit inquiries. According to a study by PwC, although more than 60% of the respondents from the industry are aware of the possible impact of AI and more than 70% estimate that AI could significantly reduce the overall costs of their businesses, only 9% consider themselves prepared to integrate this technology into their daily operations.
3. Cooperation between established institutions and emerging start-ups
Established German corporate financial players often do not have the technological expertise and innovative new strategies due to their conservative nature and a strictly regulated environment. Therefore, in the past years, traditional banks have successfully collaborated with industry disruptors and creative thinkers from FinTechs, PropTechs or InsureTechs. These start-ups contribute to existing financial models with customer-focused mobile services that stand out with their easy and convenient usage. To find out more about this emerging segment of the financial industry read our FinTech overview here.
As the clients of financial services are becoming younger and digitally connected the changes in their buying behavior is challenging the established banking institutions. These customers are demanding innovative online products and convenient credit requirements. This presents both a challenge as well as an opportunity for traditional banking as they could adapt their products for the younger generation by leveraging technology. In this context, data analytics has become crucial for banks and financial institutions which are trying to access alternative ways of customer data to improve their services and increase their profit.
Overall, the digitisation process has impacted many business areas and processes of financial institutions. This has led to a reduction of local branches as nowadays customers prefer convenient online consultations and products. Nevertheless, the digitisation has spurred the growth of online banking services for traditional banks as well as emerging financial technology start-ups.
Brexit implications for the German financial sector
Next to free movement of people, goods and services, the European Union also allows free transfer of capital among its members. As a result of the “EU passporting” regulation, financial institutions that are based in any EU country can offer their services to all EU member states which facilitates cross-border transactions and financial services.
Since the UK left the EU and the transitional period ended on January 1st 2021, financial institutions located in London, for example, lost the right to offer their services to all 400 million EU consumers. Banks from the US or Asia, for instance, who accessed the EU market through London, are now considering operating through Frankfurt or other European locations. These institutions could maintain a presence in the form of European headquarters, or a branch, in Europe to have access to the EU single market. As a result of Brexit, the bureaucratic hassle for financial institutions working from the UK will increase in the future as the UK has the stance of a third country while trading with Europe.
The financial industry is one of the largest contributors to the German economy. The sector is constantly evolving and innovating to meet market changes and the needs of consumers. Germany offers a unique environment for investing into established industry players from the banking sector.
Have you considered investing in the German financial sector? Are you planning to establish a new financial services company or opening a branch of your institution to Germany as a result of Brexit consequences?
Do you need legal advice regarding regulations for financial services or support for your legal department with experience in regard to finance?
Contact Centurion Plus Germany today for an initial consultation to find out about our legal solutions for the financial services industry.