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Localizing embedded finance in Germany: what we have learned so far

As a European BaaS, the best way to win over new customers is to localize. Here's how.

David Frei
April 25, 2023

In the world of fintech, commercial success is not possible without an intense focus on localization. While we now consider this axiomatic, we had to first discover it for ourselves. This article here is our attempt to share what we have learned from our German market launch.   

It is no secret that money is an emotional topic for folks. Trust and transparency are utmost concerns. The topic of IBANs (international bank account numbers) is a perfect example of this. When it comes to sending and receiving money in the European Economic Area (EEA), every IBAN is created equal. For those from Gibraltar starting with “GI” to Estonian “EE” ones, they all work perfectly well from a technical perspective. But, of course, not every citizen is aware. 

Our biggest learning: localized product features drive trust. In particular, when it comes to bank account numbers, there is a persistent and sticky problem of citizens discriminating against IBANs not issued in their home country.

Understanding this, we made bringing IBANs starting with “DE” to market a central aspect of our expansion push in Germany. However, addressing product and regulatory requirements proved to be a significant challenge.

There wasn’t a playbook written by others we could follow. We simply had to try, learn, iterate, and go again. We did comprehensive research, including interviews with fintechs who had gone a similar route. But, at the end of the day it felt like leaving one’s tent without a flashlight, struggling to find your footing in the dark. The guide that follows was put together to light the way for those in fintech looking to localize. We really wish this existed before we did all this hard work 😉

Traversing the local regulatory landscape as a foreign financial institution isn’t easy

Navigating the regulatory landscape is a critical part of expanding into a new market, and our experience in Germany provided us with valuable insights. The first step towards establishing a presence is to, well, be present.

We hired a local director (me) and set about the process of registering ourselves as a local branch (Zweigniederlassung) with the relevant authorities. Naturally, since we are talking about Germany, regulatory bodies require a properly registered person to serve as an Ansprechspartner; else, they won’t even talk with you!

While we set ourselves up in Germany, we also had to communicate with our regulator back home in France: the ACPR. The ask was for an allowance to passport our banking license to another country. Article 49 grants any legal person (read: company) in the EU the right to conduct business in a “stable and continuous way” in any member State. We used this law as the basis for our request to develop banking features for the German market. Needless to say, it worked. But you gotta ask first. 

Once a director is put in place, the legal entity formed, and the banking license passported, we had to clear the biggest hurdle of all: obtain entry into the local German banking syndicate. Composed primarily of regional Sparkassen, this organization is the only body that can recognize your BIC (Bank Identifier Code) number and add you to the list of approved banking organizations. This can, however, require the most precise of communication. But again, we made it through because we were committed to launching locally and putting together the best possible offering for our German customers. 

The last regulatory step is probably the simplest one. SWIFT, which is the most used rails for international payments, needs to be made aware of the existence of your new banking code. Why? So they can approve of and route payments made on their network to you. Registering with SWIFT is straightforward, you just need to remember to do it on both the national and international levels. 

To localize properly, adjustments begin first on the product level 

Adapting and testing our product to fit the needs of the German market was a crucial part of our expansion strategy. However, we were initially unaware of the extent of the necessary adaptations.

Once the regulatory requirements were taken care of, product testing and adaptation began. For us at Swan, we needed to ensure that all of our banking features were functioning as expected. 

First off, we took inventory of what aspects of our product needed to be taken care of. For cards, as an example, we knew that we had to ensure that our German customers received German cards. Adjustments were needed. 

Same for transfers. We already knew that our French issued IBANs were working, enabling our end users to send and receive money. But German IBANs starting with “DE” were an open question. We couldn’t simply launch the feature without being certain that everything functioned 100% as expected.

To ready our product for launch in Germany, we had to commit a few development cycles towards building new capabilities and adapting existing ones. Much of what we had built already to serve French customers was replicated and improved on. This includes productizing customer onboarding flows (KYC), which always have different requirements depending on the market. As an example, German authorities have different authentication requirements when it comes to opening accounts. Requiring a QES (qualified electronic signature) is one of the allowed KYC processes (the other is via video agent). We therefore had to add an additional provider of compliance to cover all the bases for our German expansion. 

We put together a strict testing regime to make sure that every payment type we support worked seamlessly. We tested if direct debits initiated from utility providers would go off without a hitch. We needed to know if other banks and financial institutions would recognize our IBANs when they ran their payment orchestration processes. 

It was prudent of us to test out our new product feature. Not everything initially worked flawlessly. But nonetheless, we managed to identify the issues and solve them prior to launch.

This testing process would not have been possible without the cooperation of three of our partners with operations in Germany. They let us test everything in a pilot phase and their insights and feedback allowed us to take care of any shortcomings we encountered. Thank you!

Let us help you localize! 

Although pursuing growth through localization presents its own set of challenges, the rewards of successfully adapting to a new market can be great. Rarely are there playbooks outlining what needs to be done to succeed. As a pioneer, you need to figure out what needs to get done and how to do it. And then, most importantly, execute. 

Especially when it comes to sensitive and emotional topics like moving and storing money, focus must be razor-sharp on trustworthiness and reliability. By not leaving any stone unturned, whether in dealing with regulatory requirements or with product testing, we were able to deliver an excellent, localized product experience. 

With these insights, you are hopefully better prepared to launch a leading fintech product in a new European market. 

If you're considering launching a leading fintech product in Germany, don't hesitate to reach out – we're here to help you navigate the process and share our expertise.

David Frei
April 25, 2023
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