N26 UK withdrawal: a cautionary tale for neobanks

Efma feature

14 February 2020

N26’s withdrawal from the United Kingdom shows that global aspirations of neobanks are not immune from geopolitical currents.

Fierce competition and entrenched players make success in the financial services industry difficult for neobanks. Add geopolitical risk as another factor up-and-coming digital banks need to grapple with as they chart their paths forward. N26, the successful German neobank, experienced an unfortunate setback this week, announcing that they would be leaving the British market on April 15th. Customers of the bank have until that date to transfer their funds to other accounts before all N26 cards and accounts will be shut down in the country.

Neobanks such as N26, Revolut, and Monzo, have clearly demonstrated their global ambitions in recent years through continued expansion. But the N26 UK episode highlights the challenges associated with becoming a truly global bank. In Europe, the bank only possesses a German banking license. This license enables them to deliver banking services throughout the economic bloc. The bank has never had a UK banking license, but was able to expand and acquire 200,000+ customers in the country thanks to harmonized European Union financial regulations.

The digital-only bank clearly believed the Brexit story would end up differently, even after the 2016 referendum set in motion plans for the nation to leave the continent. N26 opened up their London offices in October of 2018, fully a year and a half after the UK had voted to leave the continental bloc. And up until October of last year, they were publishing blog posts reassuring British customers that Brexit would not impact their bank accounts.

Given the country’s wealth, population, and proximity, it’s understandable they viewed it as a lucrative stepping stone toward their stated goal of 50 million global customers. However, banking regulations do not flow across borders as easily as goods and services. N26 now won’t be able to continue operations in the fourth most populous European nation. It may have taken 3+ years of deliberation, and is not yet fully completed, but on January 31st the UK did finally set in motion their official departure from the European Union.

Different countries have different financial requirements. This is why N26’s August 2019 launch in the United States did not come via a U.S. banking license, but in fact through a partnership with Axos Bank. As neobanks continue to grow in popularity, discordant financial regulations will continue to be an obstacle. These banks are centered around simple, intuitive, and delightful apps. While apps can be downloaded by anybody with a smartphone, country-specific banking infrastructure cannot be easily translated from state to state. And the regulations that govern financial institutions in countries can be at the whim of political decisions.

While neobanks walk and talk like app-focused tech startups, the unfortunate truth is that their growth is not about mere adoption. They face regulatory and political constraints that other startups do not. Going forward, digital challenger banks will need to ensure they correctly incorporate the political dimension into their market analyses. Each country, each economic bloc, has their idiosyncrasies. This affair will surely serve as an example to neobanks of all sizes the possibilities and pitfalls that come with global ambitions.

Keywords : GAFA/New competitors

Geography : Europe , United Kingdom