Frankfurt Setback for the Berlin smartphone bank N26: Germany’s best-known financial start-up, which was recently valued at almost eight billion euros, will withdraw from the USA at the beginning of next year. The offer will no longer be available to customers from January 11, 2022, N26 announced on Thursday. 500,000 accounts are affected.
With the withdrawal from the USA, the question is now whether N26 can still achieve the once ambitious goals – even in the long term. At the beginning of 2020, co-boss Valentin Stalf said that N26 wanted to have 100 million customers worldwide in the long term.
The situation at N26 is particularly watched by founders and investors, because the company is considered a figurehead among German fintechs. In the USA, N26 had only grown slowly recently. N26 had already reported 250,000 customers in January 2020.
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According to Alex Weber, Chief Growth Officer, N26 would have to invest significantly more to be successful in the US. Fierce competition is raging in the US banking market. Neobank Chime claims to have attracted hundreds of thousands of customers a month during the corona crisis.
N26 is now planning to “focus more on European business”. Stalf said in October that the latest round of financing puts the company “in an excellent position to become one of the largest retail banks in Europe over the next few years”.
Nevertheless, N26 is still convinced of the “global corporate version”, explained the fintech. A test phase is currently underway in Brazil. N26 also has a banking license there.
The fintech had received almost 800 million euros in fresh funds from donors in mid-October. The valuation jumped to 7.8 billion euros. This makes N26 the second most valuable start-up in Germany. Right at the top is the Munich tech company Celonis, which is currently valued at 9.1 billion euros.
Withdrawal from Great Britain has already taken place
N26, founded in 2013, is one of the so-called smartphone banks whose core offering is a banking app. As a digital company, N26 wants to assert itself against traditional banks, above all with a lower cost base – and IT from the cloud – which can also sell its services more cheaply. The companies involved in the company include the German insurance group Allianz, the Singapore state fund GIC, the Chinese Internet giant Tencent and the German-American investor Peter Thiel.
By far, however, N26 is surpassed by the British competitor Revolut, which is valued at 33 billion dollars (currently 29.1 billion euros). N26 has also withdrawn from the British market, citing the UK’s exit from the EU as a reason.
N26 is currently active in 25 countries and the number of customers is more than seven million. The information comes from the beginning of this year, now there are likely to be significantly more users.
However, fintech currently has to cope with restrictions. The German financial regulator Bafin has imposed growth restrictions on N26: The bank is initially allowed to grow by a maximum of 50,000 customers per month in Europe – which is well below the previous level. Stalf expects this restriction to apply for about half a year.
Supervision sees deficiencies in risk management
The Bafin has long complained about deficits at Neobank. The supervisors justified the growth brake with “deficiencies, especially in risk management in the areas of information technology and outsourcing management”. These deficiencies “are due to the strong growth of the bank.” Only in June the Bafin N26 imposed a fine of 4.25 million euros for a “high number” of late money laundering reports and provided the bank with a special watchdog for money laundering.
In 2020 N26 was still in the red. According to Stalf, the goal in 2021 and 2022 is to “continue to move towards the overall profitability of the company”. A profit could be within reach by the end of this year. In view of the large round of capital, according to Stalf, N26 has no time pressure to go public. He reckons that fintech will be ready for it in one and a half to two years.
Some investors find the fact that N26 is now valued at almost eight billion euros, given the growth restrictions of Bafin and the withdrawal from important markets such as the USA and Great Britain, exaggerated. You have great doubts that the shareholders of this valuation can achieve a successful exit in the near future – be it via an IPO or a sale.
“The number of potential buyers for N26 decreases rapidly when it comes to the valuation,” says a venture capitalist who has been investing in fintechs for many years. At the same time, the pressure on the N26 management after the last financing reason was great to justify the growth-driven valuation by increasing customer numbers and earnings. Several investors also have fundamental doubts as to whether N26 can become sufficiently profitable with the current business model, which primarily relies on income from payment transactions.
Only a few German fintechs dare to jump into the USA
In the scene, the brand has already suffered a bit recently. In the meantime, in the course of the latest financing round, there was even a valuation of more than nine billion euros. In addition, according to N26, none of the existing investors sold shares to other investors (in technical jargon “secondaries”). In expert circles, this is more likely to mean that the interest in N26 investments in this capital round was not very high.
So far, only a few German fintechs have dared to make the leap to the USA. The interest rate platforms Raisin and Deposit Solutions, which merged in the summer, have both been active on the US market since 2019. So far, they have been cooperating with a few banks there, but believe that their business model has led to a niche in the market.
The identity service WebID, which has been in the USA since 2018, has only won a handful of customers there. The fintech, which recently became majority owned by the British investor Anacap, initially wants to further expand its European business, and then actively tackle the US market from 2022 and 2023.
More: Fewer new customers, cover for loans, additional watchdogs: Bafin is cracking down on N26 harder than known