Our Fintech smava Becomes A Market Leader in Germany
By: Earlybird Venture Capital
Tags: Marketplaces, Banking, Vc Thoughts, Fintech, Digital West

Our Fintech smava Becomes A Market Leader in Germany

By Earlybird Partner, Christian Nagel

In over 2 decades of experience as early stage investors in the European tech ecosystem, we’ve noticed lately that financial products are trending towards online platforms. A question worth asking then is: why?

The platform advantage

The main upside of online platforms is to offer by far, more products than an offline retail outlet ever could. This holds true for retailers as well as for banks. Take for example Zalando, who can offer a much higher variety of products, sizes, colors, etc. than any main street shop could. The same framework can be applied to banks: a customer in a retail bank branch will be offered a product available by the specific brand, location, and salesperson — who may, or may not be, aware of the entire product portfolio, or lacks the perspective and visibility to support the full-range of a customer’s needs.

Marketplaces’ sticky network effect

So what about marketplaces? A marketplace (like Airbnb and Amazon) provides the best conditions because they are, by nature, transparent and competitive. Marketplaces also offer an unfair advantage: if demand grows, there’s always room for more supply. The marketplace with the highest liquidity can meet that high level of demand.

Importantly though, marketplaces are also attractive on a human level: they pull in new business and new customers, naturally multiplying and growing in offerings. They’re easy to access and once onboard, people tend to not leave them. This in turn attracts more people to become customers which has a network-effect. For a balanced view by Forbes on marketplaces, take a look here.

Reflecting on smava’s roots: from P2P to Marketplace

Today, as our Earlybird Fintech portfolio company smava acquires Finanzcheck, it’s a great time to look back on smava’s story and discover key learnings.

We invested in smava back in 2007 after the very successful IPO of Interhyp in 2005 (FRA:IYP), the leading mortgage platform/marketplace. smava started out as a peer-to-peer (P2P) lending business model with the vision that lending should be democratized, more transparent, more affordable, and more easily accessible. At the time, Lending Club just started in the US and Zopa in the UK (launched 2007/2005) for the same reason. With the P2P model, the supply to lend came from private lenders or investors who could choose between different projects whose criteria they felt comfortable with, regarding the purpose — like buying a TV set or renovating a house, and the offered interest rate. Borrowers listed their projects or needs for financing and once one or more lenders had “filled” the asked financing amount, the deal was done — money wired, no bank involved!

This sounded like a cool model — Robinhood style, long before they came into business: direct business, no intermediaries, no intransparent banking fees. So, why has this not turned into the standard for lending?

Firstly, smava realized in 2010 that “Peer” investors are not interested in everything; they only have a certain risk appetite and since they have no ability to professionally score individuals, they apply rather high risk premiums. This can mean unattractive interest rates from the borrowers point of view. Ultimately, it led smava to open the supply side to “institutional” investors, banks, insurances, family offices — basically bringing the full range of potential supply onboard. This switch from “P2P” to “marketplace” lending in 2011 was probably the most important strategic decision for smava so far. From the customer’s point of view, marketplaces are the best places to be. Ideally, they get access to the entire supply, have the best transparency, and can strike the best deals.

The second reason is that today, almost all supply comes from banks and leads to the steady decline of all ECB interbank interest rates. This has been the case for more than 20 years, starting shortly after the Internet bubble crisis. Luckily, there are enough banks and quite some competition between the European players which allows smava to advertise interest rates of 1–2% p.a. — not considering the “marketing interest rates” of -3% here. These low interest-levels leave little room for risk premiums and can only be offered due to the availability of “cheap money”, made possible by central banks at refinancing rates close to 0%. No private or institutional money manager would be able to compete on this level and hence all “Peers” as supply source left the “smava marketplace.” Maybe a pity for the “investor peers” but definitely good for the “borrower peers” who could enjoy low rates for a long period of time and most likely will continue to enjoy that in the near future.

Size matters

In FinTech, size matters. The bad news for most FinTech businesses is that they need quite a substantial amount of initial capital to build the platform, the services, the mobile apps etc. They have to be able to cover the initial losses for a period of up to 10 years, and in some cases even longer. During this early loss-making period, the unit profitability will begin and thereafter the cost will scale under proportionally which leads to constantly increasing margins. The relative cost will also decrease and tech-infrastructure is constantly getting cheaper over time, as additionally economies of scale will kick in. This can be applied for almost every part of the value chain in the smava — now smava/Finanzcheck — business model. Now, from the borrowers’ point of view, becoming a market leader is highly attractive since the interest rates or the variety may even become more attractive — at least if we are dealing in a still highly fragmented market, far, far away from monopolistic dominance.

A new opportunity and market leader in Germany emerges

The total addressable market for consumer loans in Germany is anywhere between € 203 bn and 489 bn, depending on whether you look at the marketplace consumer lending or consumer lending alone. It is therefore one of the largest financial sectors in Europe. Besides that, online penetration is low, and so it provides outstanding growth opportunities (30% p.a.). However, the market largely lacks transparency and consumers are challenged by non-standardized conditions, high administrative hurdles, and outdated distribution structures. This is an almost ideal nurturing ground for an online marketplace that re-intermediates the credit provisioning process.

smava is leading this field and can capitalize on its vast data collection by offering better credit scoring and pre-filtering to financial institutions. Given the size of the loan market and its lack of online penetration, we believe that smava has a high probability of re-defining the industry as a whole.

Today’s transaction creates Germany’s leading specialized online consumer financing platform in smava. The acquisition enables smava to accelerate the digitization of consumer loans in Germany and to continue on its impressive growth trajectory. The new combined company has over €4bn of loans brokered in 2020. We are pleased to say that the transaction was financed by smava’s existing investors, including Earlybird as an early investor, as well as a new investor, Proventus Capital Partners.

Congratulations to smava Co-founder and CEO Alexander Artopé, to the smava team on their growth, and a warm welcome to Finanzcheck team members!