Flatex only struggles with its classification by Deutsche Börse

The stock exchange does not allow Flatex Degiro in the Tec-Dax. But the online broker once again raised its forecasts on Thursday, and Flatex shares set a new record. We may even see the broker share in the M-Dax soon.

Frank Niehage, CEO of the online broker Flatex Degiro, which sponsors the Borussia Mönchengladbach soccer team.

Mith Drägerwerk, LPKF Laser & Electronics and Pfeiffer Vacuum, there are three companies among the 30 members of the German technology share index Tec-Dax whose market value of the free float is significantly less than one billion euros. The online broker Flatex Degiro, on the other hand, has a market capitalization of more than one billion euros and, to its own surprise, still has no chance of moving into this index. “Deutsche Börse has informed us that it does not classify Flatex Degiro as a technology company,” said Frank Niehage, CEO of the online broker, in an interview with FAZ

This decision by Deutsche Börse AG is surprising, after all, according to Flatex, almost half of its 900 employees are IT specialists, their 1.3 million customers reached the securities trading and custodian bank exclusively online at the end of 2020, and Flatex derives more than more than its value creation 90 percent from our own technology. Niehage therefore suspects: “The Tec-Dax should no longer show the financial industry.”

Flatex is different from neobrokers

That was different until recently: The payment transaction processor Wirecard, which has been insolvent since summer 2020, was not only a member of the Dax, but also the Tec-Dax. A spokesman for the index operator Deutsche Börse explains it like this: Wirecard was classified as a software company, Flatex, on the other hand, as a classic financial company. The classification is carried out by Deutsche Börse and is guided by where the company’s “focus on sales” lies. Deutsche Börse uses data from Thomson Reuters and Bloomberg.

Flatex is not only struggling with the Deutsche Börse classification. You don’t want to be lumped together with fintechs and new brokers such as Trade Republic or Robinhood. In fact, Flatex is by no means a young start-up. Rather, the online broker was founded in 1999 at the time of the Neuer Markt under the name Pre-IPO AG by the Kulmbach publisher (“The Shareholder”) Bernd Förtsch and was called Fintech Group between 2014 and 2019.

Listed on the stock exchange since 2009, Flatex is really getting started on the stock market: The Flatex price has more than tripled for a year. On Thursday alone, the share climbed 11 percent to a record price of 103.40 euros. Many analysts believe the share will go even higher.

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To the detailed view

Because not only the neobrokers, but also Flatex are benefiting from the flourishing stock market trading that young people in particular triggered during the corona pandemic. In 2020, Flatex sales doubled to around 260 million euros, and the number of transactions processed increased by 140 percent to 75 million compared to the previous year. After a strong first quarter of 2021, Flatex increased its targets for this year, only mentioned in February, on Thursday. The number of transactions is expected to rise to 90 to 110 million in 2021, previously Flatex had forecast 75 to 90 million. And the number of customers is now expected to be in a range of 2.0 to 2.2 million at the end of the year, after 1.8 to 2.0 million previously.

Unlike most fintechs, Flatex is highly profitable. Customers can choose between a large number of stock exchanges and pay a flat rate for them. At the latest since the takeover of Degiro at the end of 2019 and the resulting market entry in 18 countries, Flatex has been established. “We are the largest broker for private investors in Europe and more broadly positioned than some major banks,” says Niehage. You manage the accounts and custody accounts of your customers yourself in your own core banking system, have given your customers 800 million euros in Lombard loans to buy securities and now want to become “the largest provider of ETF and fund savings plans”. The dearly bought name Flatex Degiro on the chest of the soccer player of the Bundesliga club Borussia Mönchengladbach, who competed in the Champions League in Europe this season, underlines the ambitions. In the past three years, Flatex has invested 30 million euros in its own IT alone – more than some fintech companies have in terms of equity, says Niehage.

Soon to be trading in cryptocurrencies

The majority of Flatex customers are between the ages of 25 and 54. Flatex is targeting young people in a targeted manner – for example with a new app and the planned offer for trading crypto currencies such as Bitcoin. Their storage locations, be it on the Internet (“hot wallets”) or on sticks (“cold wallets”) are considered to be susceptible to hacker attacks. “We will not bear the risk of custody ourselves, but will probably solve it with a third party. Incidentally, such risks can now also be insured, ”says Niehage.

Even if it will never be enough for the Tec-Dax, Flatex Degiro will probably no longer belong to the S-Dax if the development remains the same. Rather, the M-Dax is now the goal. There are a number of companies there that also have around 1 billion market value in free float. At Flatex, there is an additional factor: 27 percent of the shares that are not yet part of the free float will probably soon be added. Because they come from the takeover of the Dutch broker Degiro. Its former owners have committed themselves for twelve months until July 2021 not to sell their shares (lock-up). “From July 2021, the shares that were previously under lock-up will no longer be part of fixed ownership per se, whether they are actually sold or not,” says Niehage. “This increases the market capitalization relevant for the Deutsche Börse indices, and Flatex becomes a candidate for the M-Dax.”