Disruptive financing innovation: an analysis of financing fintech services to SMEs and LMEs in Germany

In a widely used context, fintechs can be considered as an enabling disruptive innovation in financialservices and markets. Germany is the second largest fintech market in Europe after the UK. Fintechsthat provide financing services with financial return for the investors are crowdlending,crowdinvesting, and factoring platforms. These kinds of fintechs are defined as financing fintechs.The overall aim of this research is to critically examine the potential disruptive innovation threat offinancing fintechs that provide services to small-and-medium-sized enterprises (SMEs) in Germanyto traditional banks. After the conduction of a narrative literature review, this research is based ona qualitative multi-method approach. Financing fintech is a new phenomenon, which implies thatthe topic is relatively unexplored. Therefore, to gain an in-depth understanding and a holisticpicture of the topic to evaluate the potential disruptive innovation, a qualitative approach wasselected. First, based on a total population sampling strategy, the business model of 21 financingfintechs that provide services to SMEs in Germany was appraised in depth by the material of thefinancing fintechs’ web-presences and the application of a qualitative content analysis. Second, tensemi-structured expert interviews with executive managers of large mid-sized companies (LMEs)which have an annual turnover between 50 and 500 mn€ were conducted to critically explore andevaluate to which extent the service of financing fintechs is a substitute for traditional bankingservices to LMEs in Germany. Disruptive innovation is a theory that shows how entrants can disruptincumbents by either creating new markets or reshaping existing markets – the technology itself isless intrinsically disruptive in character, rather it is the business model that enables the disruptiveimpact. First, the entrants serve low-end or non-customers, while finally as the performanceimproves, they serve mainstream customers. The incumbents do not consider the entrants asthreat until the disruption is in its final stage because the entrants firstly serve the less-attractivecustomers. In case the entrant’s service or product is a substitute for the incumbent’s service orproduct, it can be a critical disruption which can finally lead to a liquidation of the incumbent. LMEscan be considered as mainstream customers because the traditional banks’ major focus is not onsmaller SMEs, which are the least profitable customers. The results show that although there areindications of a disruptive innovation, the disruptive innovation is limited due to structural reasonsin the business model of financing fintechs and the services required from the executives of LMEsin Germany – especially higher transaction costs and information asymmetries and the risk ofsending negative signals disable the substitution.