When N26 opened its virtual doors in January 2015, a big question mark hung over the viability of its revenue-based business model. New EU regulations stood to crimp income from card fees, raising the bar for entrants in Europe’s nascent mobile banking sector. How, observers asked, was the Berlin startup ever going to succeed?
Four short years later, N26 has confounded the doubters. Last week, the bank said it had raised €230 million ($300 million) in a further round of start-up financing – a record for a European fintech – and had more than tripled its customer base last year to 2.3 million.
Valentin Stalf, N26’s confident, fresh-faced CEO, said the extra funds would be used to fuel the bank’s expansion into the US during the first half of this year. He plans to amass 5 million customers by 2020 and eventually turn N26 into a "global bank," to fulfill an ambitious long-term goal of reaching 100 million customers worldwide.
N26’s customer explosion is all the more remarkable because digital, mobile-centric banks find it a slog to bulk up and compete head-on with their traditional brick-and-mortar rivals. To become profitable, they need to draw oodles of customers, a Sisyphean task that usually entails years of heavy investment and losses.
Profits vs. growth
Vienna-born Stalf, who is 33 years old and studied accounting and finance in Austria, Switzerland and Japan, admits N26 is still loss-making but already profitable on a per-customer basis. He asserts the bank could turn a profit over the next year if it decides to, depending on how much it wants to invest in growth.
What has N26 done differently to get so far, so fast? For one thing, it neatly offset a squeeze on card revenues from the EU’s Interchange Fee Regulation, which came into force in 2015. The measure made card payments cheaper for retailers but cut payment-related revenues for card-issuing banks.
To cope, N26 diversified, keeping its no-cost, no-frills current account while raising fees for its “Black” account card and introducing a new, top-of-the-line “Metal” card, designed to lure holders of business-crowd rivals such as American Express. The bank also makes money from other product fees such as overdrafts, and offers perks such as travel insurance, discounted hotel bookings and membership in workspace chain WeWork.
“Worldwide, too many people still use bad digital banking products and pay fees that are too high,” sniffs Stalf, who quit his job at German incubator Rocket Internet in 2013 to found N26 together with his friend Maximilian Tayenthal.
Free global withdrawals
Customers rave about its slick smartphone app, which allow users to get instant transaction notifications, track expenses, find ATMs in the vicinity and swiftly transfer money to other N26 users. The app is also equipped for transactions with Wirecard, Google Pay and, since October, Apple Pay.
The most popular feature, however, is the ability to make free payments in euros worldwide and for its Black and Metal account holders, free withdrawals anywhere. The German bank finagled this by entering a partnership with TransferWise, a UK-based money transfer service.
N26 is branchless but operates in 24 European countries with 700 employees in Berlin, Barcelona and New York. Last week it said its customers had deposited more than €1 billion and that monthly transaction volumes topped €1.5 billion.
The bank’s launch in the UK market last autumn has clearly paid off, as the CEO recently estimated that 1,500 to 2,000 new N26 accounts are opened in Britain daily. The process is a snap: Applicants need no more than eight minutes to open an account with video-identification software by smartphone.
Conventional banks in the dumps
The upstart’s heady growth contrasts with the plight of Germany’s dominant lenders. Deutsche Bank is struggling to return to profit as it faces probes into suspected money laundering, while Commerzbank remains partly state-owned after taking a crippling hit in the global financial crisis. Indeed, many young customers prefer the simplicity of N26's online focus over the tradition- and bureaucracy-heavy legacy lenders. Who wants to use their father's bank if N26 can make banking more transparent?
In the face of N26’s runaway popularity, investor skepticism about the bank’s prospects has evaporated. “N26 is the clear market leader in mobile banking in Europe,” said Harley Miller, a principle at Insight Venture Partners, a US private equity firm and N26 backer. “The company is in great shape to expand this year into the US market.”
Highlighting N26’s growing allure with global investors, the latest fundraising round was led by Insight and Singapore’s sovereign wealth fund GIC, and was joined by Chinese internet giant Tencent, Germany’s Allianz and Hong Kong’s Horizons Ventures, owned by billionaire Li Ka-shing. Its early financiers included Peter Thiel, a co-founder of Paypal. Investors say N26, which isn’t yet listed on the stock exchange, is now worth €2.3 billion – making it Germany's first fintech unicorn, a company valued at over $1 billion.
No farmyard nonsense
The CEO is keenly aware of the need to offer fickle digital users real incentives to use N26 for their primary accounts, as many customers still keep their main ones at conventional banks, perceiving them to be more secure. A whale among minnows in Europe's fintech boom, Stalf's startup still faces plenty of competition from other app-based banks including Britain's Monzo, now valued at 1 billion pounds (€1.1 billion).
N26, whose slogan is "banking without the bullshit," has studiously avoided gimmicks. A few years ago Fidor Bank, a Munich-based rival founded in 2009, began to offer interest rates on current accounts and loans based on the number of likes on its Facebook page, in the hopes of turbo-charging its profile. Today, Fidor has no more than 250,000 account-holders – about one-tenth the size of N26’s customer base.
Jeremy Gray is an editor at Handelsblatt Today. Peter Köhler and Katharina Schneider, financial correspondents for Handelsblatt, contributed to this article. Reuters provided supplementary coverage. To contact the author: [email protected]