startup supervision Keeping Tabs on Fintechs

Germany may set up a watchdog to monitor financial technology startups, better known as fintechs. Experts say regulators have been uncharacteristically lax in keeping tabs on these industry upstarts.
Fintechs need to answer to the powers that be.

Germany may set up a new set of regulators to oversee the rapid proliferation of financial technology startups.

Jens Spahn, the parliamentary state secretary for finance, said the sector needed proper supervision, to help both the entrepreneurs setting up the companies, and the customers and investors who may put money in them. He wants to see around 20 regulators monitoring the area.

"A fintech team that helps entrepreneurs through the regulatory jungle would be a real step forward," Mr. Spahn told Handelsblatt.

German fintechs have grown by 54 percent over the past year to more than 400 companies, according to the latest analysis conducted by Barkow Consulting and reviewed by Handelsblatt.

Fintechs leverage digital technology to provide traditional financial services, often side stepping traditional brick-and-mortar institutions.

Bafin's passive observation is incomprehensible and almost negligent Klaus Fleischer, professor, Munich's University of Applied Sciences

The Hamburg-based online lender Kreditech, for example, uses an algorithm that analyzes 20,000 data points to determine a customer's credit worthiness.

But fintechs are largely left to their own devices in Germany. Klaus Fleischer believes the Federal Financial Supervisory Authority, known by its German acronym Bafin, needs to be more aggressive.

"Bafin's passive observation is incomprehensible and almost negligent," Mr. Fleischer, a professor at Munich's University of Applied Sciences, told Handelsblatt.

And regulating the startups will only become more difficult as the fintech sector grows into a multi-billion-euro industry, Mr. Fleischer said.

"Putting the breaks on that train once it's gained steam is more difficult than creating a framework beforehand," he warned.

The Association of German Banks, which represents more than 200 financial institutions, has also called for the authorities to provide fintechs with definitive answers to regulatory questions.

Germany's peers have already taken concrete steps. British and Australian regulators have set up "innovation hubs" to keep tabs on the finance startups. And Singapore plans to open a "Fintech Office" in May.

In the United States, meanwhile, the Office of the Comptroller of the Currency recently published a paper laying out draft guidelines for how authorities should deal with fintechs.

"It's possible that we will decide to create a new authority that devotes itself to the subject of innovation," said the U.S. comptroller, Thomas Curry.

The Financial Stability Board – a body that brings together the world's most important central banks, regulators and finance ministries – has also taken up the subject.

The board's members have agreed to conduct more in-depth analysis of fintech innovations, assess the risks for financial stability and develop regulatory perspectives.

"The regulatory framework must ensure that it is able to manage any systemic risks that may arise from technological change without stifling innovation," said board president Mark Carney, as reported by Reuters.

The Fintech Sector in Germany-01

According to Handelsblatt's sources, the board's work is still in its early stages and there's unlikely to be any concrete proposals before China's leadership of the G20 ends in November.

Many countries, however, are seeking to encourage innovation by creating so-called "sandcastles" in which fintechs can try out new products free of any regulatory burdens.

The United Kingdom has announced it will set up a sandcastle sometime this year, and the Australian government has also expressed openness to the idea. Switzerland has developed the idea the furthest, freeing fintechs worth less than €200,000 from any kind of regulation at all.

German regulators, however, have already rejected this model.

"The sandcastle model hides a conflict of interests," said Bafin President Felix Hufeld at the beginning of the year.

And in a recent podcast, State Secretary for Finance Jens Spahn made clear that "generously compromising" on regulation "is not the German approach."


Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt.  Holger Alich is Handelblatt's Switzerland correspondent, covering the financial industry. To contact the authors: [email protected] and [email protected]