We have extracted the key findings and assessed their applicability to the German financial industry based on our research and project experience.
Poor Timing
When customer needs and the market are not addressed in a timely manner, the loss of relevance and economic failure can occur rapidly. Since the “winner-takes-it-all” phenomenon also characterizes the platform economy, choosing the right timing for market entry is crucial.
Poor timing can have various causes, and not all of them can be influenced. For example, the advanced payment service provider Lendstar had to file for bankruptcy in 2018 after 6 years of market presence, even though it was acquired by epay at the last minute. According to founder Christopher Kampshoff, a crucial factor was the inappropriate timing: “We started in 2012 as a pioneer in mobile payments and were simply too early.”[2] This once again confirms that generating innovations is one thing. However, successfully placing them with customers at the right time is a different challenge.
Financial Backbone
Many Gig Economy platforms[3] collapsed within 2-3 years because they lacked sufficient users or financial resources. Independent companies had an average lifespan of only 3.7 years, while financially stable acquired companies survived almost twice as long in the market. Interestingly, companies that were part of larger entities had only an average survival duration.
In Germany, we observe that many FinTechs or InsurTechs with platform business models are financially weak. To what extent they can strengthen their financial backbone depends, especially in the market entry phase, on how well they can attract both customers and investors.
The “chicken and egg problem” arises from the mutual dependence of the mentioned stakeholders (indirect network effect). The more customers, the more interested the investors. The higher the investments in the platform, the more attractive it becomes to customers. This not only threatens overall viability but also complicates the search for cooperation partners.
In several projects, we have seen that established banks and insurers distance themselves from financially weak platforms out of fear of potential damage to their reputation. This is largely due to the German risk aversion. Studies have shown that European role models in saving actually invest only 0.043% in risk capital, significantly less than the EU average in risk capital investment, and they are particularly reluctant to invest in more mature start-ups. In comparison to North America, a funding round in the late-stage phase is almost half as substantial in Germany. Compared to Asia, we lag behind by two-thirds.[4]
Incorrect Pricing
When either end customers or product providers are offered an incorrect price-performance ratio, this can diminish the attractiveness of the platform and the associated network effects. Since platforms mainly generate their added value through network effects, an incorrect pricing policy can prove to be a fatal obstacle.
Many platforms in Germany fail despite a relatively large domestic market and EU passporting, mainly in building a sufficiently large customer or user base; however, monetization is often even more challenging. In our experience, customer willingness to pay is frequently underestimated, or the exploration of additional revenue sources through the inclusion of more partners is neglected.
Lack of Trust Building
The attractiveness and usage of the platform are heavily dependent on the trust customers place in it. Poor ratings, ratings, payment mechanisms, or insufficient data/payment security all play a crucial role in this.
Perhaps the biggest hurdle to overcome when entering the platform economy is the high degree of customer loyalty and low willingness to switch, especially in markets like Germany. Statistically, Germans get divorced more often in a year than they change their main bank.[5] This is also one of the reasons why established companies with strong brands have a competitive advantage when entering the platform economy: customer trust and emotional attachment are already present and do not need to be painstakingly built from scratch.
Underestimating Competition
Management’s attitude has a significant impact on the business and, consequently, platform success. Short-sightedness, hubris, and arrogance have led – especially in Anglo-American companies – to disastrous consequences. For example, while Microsoft was able to maintain a whopping 95% market share with its Internet Explorer in 2004, by June 2020, only about 8% of Internet browsers came from Microsoft.[6]
While we have not observed hubris and arrogance in the FinTech scene or the innovation units of established players within German borders, we also see, in the field of platforms, an often overly undifferentiated offering, too much imitation, and not enough innovation. Especially since the PSD2 directive, banks face a significant challenge associated with interface opening and resulting transparency: competition for customers in the financial sector has increased, and customers have become more demanding. Simply copying a business model in the hope of being annoying enough to be acquired by the market leader is no longer sufficient today.
Authors: Stefan Roßbach & Erna Sakic
References
[1] Cusumano, Yaffie, and Gawer (2019): “A Study of More Than 250 Platforms Reveals Why Most Fail”
[2] Handelsblatt (2019): “Few Shine, Many Fail: A Wave of Bankruptcies in Fintechs”
[3] In a Gig Economy platform, orders from end customers are initially centrally bundled and forwarded for execution to independent self-employed contractors/service providers. Well-known examples include Uber, Foodora, and MyHammer.
[4] Handelsblatt (2019): “Germany Lags Behind the EU Average in Terms of Start-up Investments”
[5] Oliver Wyman (2019): “Race for the Customer – Loyalty as an Outdated Model” (2018), Statista: “Number of Marriages in Germany by First Marriages and Remarriages from 2013 to 2018”
[6] Statista (2020): “Market Shares of Leading Browsers Worldwide Until May 2020,” Statcounter (2020): “Desktop Browser Market Share Worldwide,” Cusumano, Yaffie, and Gawer (2019): “A Study of More Than 250 Platforms Reveals Why Most Fail”
