German challenger bank N26 announced a $900 million Series E funding this October. N26 coupled that announcement with another, that it was renewing its focus back to its home markets, central and eastern Europe, and would pause its activity in the US market.
N26’s latest funding values the firm at $9 billion, a significant jump from its $3.5 billion valuation at the time of Series D in 2020. N26 is now the most valuable fintech out of Germany and ranks among the top 20 globally.
Since publicly entering the US market in partnership with Axos Bank back in August 2019, N26 released a variety of services in the country, like contactless payments, easier account funding, 2-day early direct deposit, spending limits, ATM locator, discounts, and other perks.
This initial offering powered the bank to claim it had registered some 500,000 customers in the US. However, with its latest funding, the firm has pulled back on its operations in the US. From half a million customers, it has now reverted to having a waitlist in the country.
This forces one to wonder whether this is another case of a European fintech firm withdrawing from the US market. Earlier, British fintech Monzo withdrew its request for a banking license in the US, following discussions with regulators and the Office of the Comptroller of the Currency. Revolut’s second US CEO, Ronald Oliviera, will be leaving the firm over the next few months. While it is unclear where Oliviera is headed next or why he quit the firm, there have long been reports about Revolut’s questionable work culture, with unpaid work, unachievable targets, and high-staff turnover, according to an insider.
However, is it fair to say that N26 has meaningfully retreated from the US market? Yes, says Omer Menashe, founder of US challenger bank Persona. “N26 definitely looks to be taking a step back with no specific time of return --so, essentially nixing the US plans by reverting back to a non-commital waitlist,” he told Tearsheet.
The general trend of European fintech entering the US market only to leave prematurely has become notable. US soil is proving to be difficult ground for fintech firms from across the pond to find a firm footing in. It could be how they rely on different sources of revenue than their American counterparts. European neobanks have a fundamentally different approach in monetization than US ones.
American challenger banks can leverage the interchange fees to manage their profits, relying on them to stay afloat. In Europe, however, there is an interchange cap at 0.3% of transaction value on credit cards and 0.2% on debit cards. This means that European firms rely deeply on their monthly subscription payments and need to be more efficient to match their American counterparts’ performance.
“The US user, be it consumer or commercial, is not used to paying a monthly subscription for the neobanking experience which is why we don't generally see EU neobanks making the approach. Those who do -- as with N26 -- turn back,” Menashe said.
Seemingly, America is difficult territory for neobanks expanding westward, and the performance of those who dare to make the trip does not ignite much confidence.
“If EU neobanks were already cautious of making a US approach before, this will certainly add to the concern,” he said. “My bet is that we will not be seeing an uptick of EU-based neobanks coming into the US any time soon.”
Earlier this year, N26, which holds a full-fledged banking license in Germany, was fined €4.25 million for weak money laundering controls by the German regulator BaFin. The firm was late in forwarding around 50 cases to the regulator, flagged for anti-money laundering-related suspicious activity, taking more than the allotted 72 hours. While the firm does not challenge this fine, it says the problem has since been addressed. N26 assured regulators that it has invested in key regulatory functions over the last 18 months.
Whether or not N26 has met its regulatory requirements and satisfied BaFin will soon become apparent as the two have decided to temporarily limit signups to 50,000 to 70,000 new users per month. If the regulator finds that N26 has in fact satisfied all requirements, the limit will be lifted. That’s a big change for a company that was opening an average of 170,000 new accounts per month in the past year.
When communicating the news to their customers in a blog post, the company completely left out the mention of BaFin. It reads instead, “To lay even stronger foundations for our business in the future, we are increasing our focus on our service experience, product offering, and processes—to become an even better bank for you in the years to come.”
“Based on this decision, in conjunction with the overwhelming demand for N26’s digital banking products, we will be making a temporary adjustment to the number of new bank accounts that we can offer each month. This means that we may not be able to instantly provide every new customer with an N26 account, at least in the short-term.”
N26’s current round of funding was led by Third Point Ventures and Coatue Management and joined by Dragoneer Investment Group and N26’s existing investors. With the new round of funding, the firm hopes to significantly expand its mobile offerings, hire a thousand more employees globally with a focus on product, technology, and cybersecurity.
Today, the company serves 7 million customers across 25 countries and believes it’s on track to complete $90 billion in transaction volume in 2021 alone.
“This recent financing round solidifies the fact that retail banking as we know it has changed. With our fresh capital, we are in pole position to become one of the biggest retail banks in Europe, all without a single branch,” said Valentin Stalf, CEO and Co-Founder of N26.