To date, start-ups in Germany’s financial industry have generally been stuck in a corner, obscured by larger banking giants like Deutsche Bank and Commerzbank that still have a stranglehold on business. But one Berlin start-up is well on its way to leaving this niche world behind.
Zencap, just over one year old and based in the German capital, has been handed a record investment from the United States. The U.S. asset manager Victory Park Capital said Tuesday that it will pump $230 million into Zencap to help it expand across Europe.
That's the most ever given to a European financial start-up.
With the new money in hand, Zencap, an online market place for company loans, is ready to emerge as a competitor to Europe’s traditional banks.
“Victory Park will support us with $230 million, together with a U.S. bank; this will help us in financing loans in Germany, Spain and the Netherlands,” Matthias Knecht, the co-chief executive and co-founder of Zencap, told Handelsblatt.
A U.S. bank also involved in the deal was not named.
The cash injection marks a new record for the branch of start-ups around the world dubbed "fintechs," which marry traditional finance with digital banking solutions. No such financial start-up in continental Europe has ever received such a large investment.
That an international investor like Victory Park Capital is willing to devote so much money to Zencap is likely to make the German industry take attention.
The U.S. engagement also shows the increasing threat that such tiny but fast-growing digital invaders pose to traditional banks.
Some analysts, however, say the start-ups such as Zencap still have a way to go to prove their businesses will survive over the long haul.
Zencap was founded in Berlin in spring 2014 by Mr. Knecht and chief financial officer Christian Grobe in Berlin and belongs to Rocket Internet, which is owned by the Samwer brothers.
Victory Park may only be known by a few in wider Germany, but the investor is hardly new in the financial industry. The company has already invested millions in the United States and Great Britain. It has also invested in another German start-up, the Hamburg-based fintech firm Kredittech.
"We are impressed with the Zencap team's ability to execute an ambitious strategy, and their results in the three countries they operate in give us confidence that this emerging platform is serving a critical market need," Gordon Watson, principal investor at Victory Park Capital said in a statement Tuesday.
Zencap was founded in Berlin in spring 2014 by Mr. Knecht and chief financial officer Christian Grobe. It is a subsidiary of Rocket Internet, a start-up incubator that has launched a series of successful firms including Zalando, Europe's largest online clothing retailer.
Zencap’s business model has apparently managed to persuade Victory Park Capital’s management that it has what it takes.
On its platform, the company offers business loans of between €5,000 and €250,000 and running up to 5 years. When the debts are paid early, no prepayment penalties need to be paid. Loan applications are decided upon within 48 hours.
While the company has secured a major boost with Victory Park Capital’s investment, co-founder Mr. Knecht says Zencap will not turn down or discriminate against any other investors in the future.
"Up until now we have financed 500 loans of a volume of €27 million. With the new investment we can increase that growth in the coming three years," Mr. Knecht said.
This year is supposed to bring in more than €50 million. Considering German banks' billion-dollar high loan engagements, this may not seem like much, but it depends on which perspective you take.
The company ,which compares itself to U.S. companies like Lending Club or British firms like Funding Circle, sees itself as the fastest-growing loan platform in Europe.
Traditional banks are still unsure how they should react to the growing mega trend.
Deutsche Bank and Commerzbank have built their own start-up incubators to start profiting from the fintech model themselves. Buying into these firms may also be possible.
Others are just looking for partnerships. Jürgen Fitschen, the outgoing co-chief executive of Deutsche Bank, has said that he sees fintechs as partners "with whom which we could get easier access to financial products and a better service quality altogether."
Zencap is not afraid of banks but does not see itself as a technology-supplier to the existing giants either.
That means that if they do cooperate, fintechs like Zencap are increasingly expecting that cooperation to be on equal footing.
An example: Zencap started a cooperation with Sparda bank in Berlin in May 2015, allowing 500,000 Sparda customers to participate in a Zencap project at a discounted rate.
"We were persuaded by the digital offers and the rapidly moving fintech industry," said Sparda's chief executive Frank Kohler.
Zencap, like the Samwer brothers that own Rocket Internet, is thinking big.
"Our mid-term goal is to become the biggest online platform for loans in Europe," said Mr. Knecht.
Implicitly, this means the company isn't happy with just grabbing market share in Germany, the Netherlands and Spain. Nor does Mr. Knecht expect the firm to remain beholden to business loans, he said, adding that he can imagine expanding into areas like real-estate loans or factoring.
The crux of a platform like Zencap's is the risk management of debtors. According to Mr. Knecht, defaults on its loans have been less than 1 percent so far. But because the company is still young, it hasn't yet experienced a full credit cycle.
The litmus test therefore has yet to be passed.
Friederike Stradtmann, who works for consultancy Accenture, said the assessment of risks stemming from company loans will be critical for the success of such platforms going forward.
"Investors who take on higher risk – the kind that may be denied by banks – will expect risk premium in the form of a higher yield," she said. If Zencap can't provide such higher yields, investors are likely to pull back their investments from such platforms, she believes.
In this respect too, Zencap says the U.S. investment is "extremely positive". The more loans that are given out, the more data Zencap can obtain about companies and industries, which in turn will help in making its risk analysis of industries more sophisticated. Getting better data would also help minimize credit defaults.
In the mid-term, customers can still obtain loans at favorable conditions. It is here at the latest that the way would be paved for an exit out of a niche market.
Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. To contact the author: email@example.com