The pullout of N26 from the U.S. banking market, closely following the departure of Monzo, is a stunning turn of events given the sky-high expectations of European neobanks in America. Only one significant European neobank, Revolut, still has a U.S. presence.
N26 — a German neobank — is withdrawing from its beachhead in the U.S. banking industry starting in early-January 2022, leaving an estimated 500,000 accounts up for grabs. That’s a small fraction of the 13 million accounts claimed by leading U.S. neobank Chime.
We would need to invest significantly more and prioritize the market over our other global priorities if we are to truly make the U.S. a success in the long run.
— Spokesperson for N26
The all-digital bank is by no means the odd man out in failing to penetrate the American financial market. Just six weeks earlier Monzo, the most popular neobank in the U.K., withdrew its national bank charter application, which it had filed for in April of 2020.
Valued at over $9 billion, N26 began operations in Europe in early 2015. While it signed up about 500,000 customers in the U.S. over two years, the neobank has seven million customers across 25 markets worldwide. In Europe, N26 has a full banking license but in the U.S., its accounts were offered in partnership with Axos Bank.
Implications For the Banking Industry
Some industry experts think N26 stepping back will ultimately have a negative connotation for other neobanks vying for a grip in America. Others contend the move won’t even make a difference in the grand scheme of things.
A lively debate flared up on Twitter following the announcement. Ken Tumin, publisher of DepositAccounts, vented that “it doesn’t help neobanks build trust when neobanks like N26 discontinue operations in the U.S.”
Ron Shevlin, Managing Director of Fintech Research at Cornerstone Advisors, quickly countered that argument, pointing out that it’s likely most Americans haven’t even heard of the N26. “I don’t see why other neobanks would be affected by N26 leaving the market,” he retorted.
The Finanser’s Chris Skinner likewise noted in a tweet that now “#N26 and #Monzo both tried and left America,” to which Moven Founder Brett King responded: “The reason the U.S. remains years behind China in respect to #fintech is that the U.S. is a hostile environment from a regulatory environment, especially when compared with the EU, Hong Kong, Singapore, China, etc.” Moven, one of the first neobanks, itself failed to move the needle in the U.S., and closed its banking operations in 2020. (The company continues as a provider of financial wellness technology to financial institutions.)
Jim Marous — Co-Publisher of The Financial Brand, CEO of the Digital Banking Report and host of the Banking Transformed podcast — says that it’s difficult for any fintech to make it in the United States and earn the trust of customers, notably for those companies without a banking license.
“Getting a banking license is a long haul, especially as regulators are getting pressure from legacy banking organizations to tighten up criteria,” Marous explains. “This path to becoming a bank and achieving scale is even tougher for a foreign entity. For most players, the best option continues to be to partner with legacy financial institutions.” Only one neobank, U.S.-based Varo Bank, has obtained a national banking charter so far.
N26, in particular, was struggling with low brand recognition, Marous adds, which is “a challenge in moving beyond being a secondary financial provider for those who had signed up at N26.”
Tough for Any Bank to Crack the U.S. Retail Market
Neobanks aren’t the only financial institutions struggling to make it in the huge American market. HSBC pulled out of retail banking in the U.S. in late May 2021, handing off its physical branches and customers to Citizens Financial Group and Cathay Bank.
“It doesn’t help neobanks build trust when neobanks like N26 discontinue operations in the U.S.”
— Ken Tumin, DepositAccounts
Spanish bank BBVA not only stepped away in November 2020, but also shut down its digital-only subsidiary, Simple, regarded as the first U.S. neobank. Japanese banking giant MUFG sold its U.S. banking operation, Union Bank, to U.S. Bank earlier in 2021, and Reuters reports that BNP Paribas is actively shopping its Bank of the West subsidiary.
All this puts the spotlight squarely on London-based Revolut — which is the most popular digital-only bank in 17 countries. The fast-growing company has a broader range of services than many other neobanks, and is currently building a crypto exchange, according to CoinDesk. Time will tell if it can hang onto its place in the U.S. market.
Reasons Why N26 Is Bowing Out
A spokesperson for the all-digital neobank, tells The Financial Brand that the real reason N26 is stepping back its role in the United States is because the European market presents a major opportunity for N26, where it already has a full banking license.
“While we recognize the progress we have made in the U.S. since launching in the market over two years ago, we would need to invest significantly more and prioritize the market over our other global priorities if we are to truly make the U.S. a success in the long run,” the spokesperson explains.
The neobank had big plans when it first launched in the American market, even though it debuted a year later than it was meant to. Originally, the idea was to break into the U.S. in mid-2018 when the neobank would “offer a checking account with full use of a card, money transfers, cash withdrawals, and features tailored to the U.S. market, including an attractive customer reward program.”
Goals Proved Too Big:
N26 wanted to make it big in the United States — it even wanted to design a fintech hub that would spur innovation in the banking industry.
The neobank’s executives were also looking to play the long game as well, announcing it planned to build “a fintech hub with more services and becoming the one-stop shop for all its customers’ financial needs.”
As recently as February 2021, N26 told Banking Dive it was hoping to double down on its United States footprint in the upcoming year. Chief Growth Officer Alex Weber said the neobank planned to increase its customer bases by 75%, in addition to tapping 200 more employees.
Run-Ins With Regulators
Yet, many of N26’s plans haven’t panned out. The news of the neobank leaving the U.S. comes a little more than a month after German regulator BaFin ordered N26 to limit onboarding European customers to 70,000 a month, according to the Wall Street Journal. The Journal reported that “regulators have found issues with the digital bank’s internal controls, which banks need to maintain to prevent illegal activity.” This regulatory action was one of three to happen in three months to “improve the bank’s controls.”
It’s also not the first time that the neobank has reined in its product offerings in other countries. In February of 2020, N26 told customers it was pulling out of the U.K. because it wouldn’t have a license following Brexit.
While the neobank blamed Brexit for its U.K. departure, European publication Sifted says that N26 had been struggling to gain a strong following in the U.K. Just a little over two months before it pulled out of that country, the publication published a report detailing the neobank’s struggles.
“Fresh data shows that N26 is far behind its local peers in terms of monthly active users (MAUs) and downloads so far this year. Among British fintechs, N26 ranks 19th by MAUs, according to data from iOS and Android users,” the Sifted report reads.
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A Peek Into N26’s Plan B
Regardless of its struggles in other countries, Chief Growth Officer Alexander Weber told Bloomberg that N26’s new focus will be on expanding its European footprint further and that the neobank’s team even plans to soon launch services in Brazil. It will face stiff competition there from NuBank, which, with 40 million customers, is the largest neobank globally.
The N26 spokesperson tells The Financial Brand the decision to leave the U.S. market was “to prioritize our efforts especially when it comes to developing a world-class product. While there is never an easy time to make a tough decision like this one, we believe that it will help us approach future expansion from a position of even greater strength.”
The neobank announced in May 2021 it would be breaking into the insurance sector with the launch of N26 Insurance, in partnership with European Insurtech Simplesurance. The insurance product will give the digital bank’s customers “the option to purchase coverage, manage plans and initiate claims for a range of insurance plans from different providers for every life need.”