Behind N26’s failed UK expansion strategy

27th March 2020  

by Ascanio Orombelli

Last February, the Berlin-based digital bank N26 announced that it was pulling out of the UK, blaming the country’s decision to leave the European Union.

The fintech startup, which has raised €600 million up to date (latest round, in July 2019, was a €417 million Series D with investors including Allianz and Tencent among others), said that it will “be unable to operate in the UK with our EU banking licence, so we will be leaving the UK and closing all accounts” in April.

Industry experts, however, have immediately doubted about Brexit being the reason for the move out of the second most prominent fintech market globally. The German company, indeed, seems to have performed weakly compared to main rivals (Revolut and Monzo) in UK and understood it would not have gained consistent market share in the country because of the extremely saturated market.

As a matter of fact, N26 knew Brexit was coming. The company launched in Britain in October 2018 (as the newest entry to the country compared to London-native Revolut and Monzo), over two years after the Brexit vote and six months before the UK was originally scheduled to leave the EU. Last October, the company had even reassured users in a since-deleted blog that they would “not experience any changes…regardless of the 31st October outcome”.

In addition, data show that N26 was struggling to catch up in UK, after expanding out of Germany (where it launched in January 2015, before Revolut and Monzo that both entered the market around July of the same year, starting from the UK). Despite having 5 million customers globally as of January 2020, among British fintechs N26 ranked far behind its local peers by Monthly active users (MAUs), coming in 19th place according to data from iOS and Android users (App Annie).

Top Fintech Apps by Monthly Active Users UK (Jan. – Oct. ’19)

Source: (App Annie)

While the company’s late arrival in UK could be an explanation for its smaller user base, download data in December 2019 ranked N26 app in 16th place for the fintechs, a metric that contradicts N26 narrative.

Sarah Kocianski, head of research at fintech consultancy 11:FS, said on Twitter following the N26 announcement: “No-one in the industry is really surprised by this. Why bother getting, and maintaining a license (along with regulatory capital) in a market where you face stiff competition, when you could go many other places where you don’t?”.

The German challenger bank, hence, likely struggled to differentiate itself from competition in an already heavily-populated digital market. The company user-experience ratings also put it behind its UK peers, creeping below 4* on average (App Annie).

Ratings for the digital banks for iOS and Google Play

Source: (App Annie)

Notwithstanding a constrained user base in UK, N26 aimed to build a customer base that paid for itself without putting too much pressure on its financials and user-acquisition budget. Hence the company model relied on pay-to-use premium offering (globally, 30-35% of N26 customers are Premium users).

“[We’re targeting those] who a bit more premium, a little bit older, a bit more mature,” Will Sorby, N26’s UK general manager told Sifted in April. However, that model seemed not to have worked in UK where customers had less appetite to pay for N26 Premium offering than German users. On top of that, there had been complaints over the fact that N26 forced users to make a first ATM withdrawal to fully activate their payment cards and that the virtual bank, unlike its competitors, had overseas ATM fees for its standard offering.

Moreover, a joint investigation by Sifted and Germany’s Finance Forward has found that “N26’s UK division took a series of blows in the months prior to the announcement, including a run-in with the UK’s Financial Conduct Authority (FCA) and a series of high-level resignations”, as Sifted reports.

N26 UK had to handle claims about the unintentional mis-selling of travel insurance included in the monthly fee for their premium “Metal” card. N26 acknowledged in an email that they had failed to ask key health questions to determine if the policy was “appropriate” for all its UK customers, according to UK regulations. And that means, as Sifted explains, that many premium users with certain pre-existing conditions could have bought travel insurance “that they were actually ineligible for”. In case of need, they wouldn’t have been able to file claims and receive reimbursements for medical expenses despite having paid for the insurance coverage. N26 confirmed it was forced to refund several UK users who had bought Metal membership despite being ineligible for the insurance.

After this regulatory problem, the fintech player has therefore suffered a financial blow - although manageable - and probably a loss of confidence in the UK market that contributed to its decision to leave. The German company has understood its difficulties to penetrate a saturated and complex market and has taken the hard choice to abandon it, with the downside of damaging its brand reputation.

N26 is now trying to exploit the first-mover advantage by being the pioneer among European fintech giants (Revolut and Monzo being the others) to enter the US, in an attempt to gain market share prior to its rivals and, hopefully, avoid the mistakes done in Britain.

Although US fintech market accounts for almost 60% of the global fintech scene, there are many players already fighting for a share in the market and the competition can also be increased by the entrance of Revolut.

The UK-based fintech has recently raised a €450 million Series D, at an almost €5 billion valuation, becoming the most highly valued fintech in Europe, alongside Swedish lender Klarna, and has in plan to raise an additional $1 billion in debt. Revolut will use the proceeds to consolidate its leading position in the European fintech scene as well as to plan a successful strategy for entering the US market.

N26 will need to watch its back and possibly plan a fundraising to be ready to respond to Revolut’s US penetration, although the current economic turmoil will not make things easy for the German player.

Indeed, following the outbreak of the Coronavirus at a global scale, N26 cofounder Maximilian Tayenthal has told Bloomberg: “Our customer’s card sale in March have so far declined. In certain markets we’re seeing a 10% drop in account openings”.

As the pandemic begins to weight on the economy, fears are growing that fintech startups will be hit hard, as investors invest less and consumer spending slows.

A financial crash could lead to fewer users moving their salaries into their challenger accounts, or even causing existing users to withdraw their deposits into ‘brick and mortar’ accounts. This could have an impact beyond the immediate crisis, worsened by reduced interest rates, further reducing the margins made by fintechs on deposits.

Digital banks that charge for their accounts, like N26, are also likely to see a dip in subscription openings, especially amid a contraction in travel.

If the current crisis spills into recession, the German company will struggle for fundraising and might experience a heavily reduced valuation.