German fintech company N26 has faced significant regulatory scrutiny over the past few years, primarily due to its inadequate anti-money laundering (AML) controls. This regulatory pressure has not only resulted in substantial fines but has also impacted the company's growth and valuation. However, recent developments indicate a potential turnaround for the online-only bank.
Regulatory Hurdles and Financial Impact
In 2021, Germany's financial regulator, BaFin, imposed a cap on N26's new client sign-ups, limiting them to 50,000 per month. This was a significant reduction from the bank's average of 170,000 new clients per month at the time. The cap was slightly increased to 60,000 last year and is set to be removed in June, according to N26. BaFin has not commented on this development.
The regulatory body fined N26 €9.2 million last week for the late filing of suspicious activity reports in 2022. This followed an earlier fine of €4.25 million in 2021 for similar issues in previous years. An independent monitor will continue to oversee N26's AML controls on behalf of BaFin.
N26 co-founder Valentin Stalf revealed that the direct costs associated with these regulatory challenges amounted to €100 million. This includes spending on control functions, monitoring systems, and fines. However, Stalf emphasized that the indirect costs were much higher, potentially amounting to billions of euros. "The impact on N26 surely amounts to billions of euros because it lowered the company’s valuation as we were unable to grow," he said.
Shifting Priorities: From Growth to Profitability
Despite the lifting of the cap, Stalf stated that N26's priorities have shifted since 2021. The focus is now on the profitability of clients and market attractiveness rather than rapid expansion. "Our key priority won’t be growth but profitability of clients and attractiveness of market," he told the Financial Times. He added that N26 aims to create "a sustainable portfolio of clients which is profitable in the long run."
While the company will "of course" grow from June, Stalf did not provide specific expansion targets. He did, however, express optimism about the business dynamics, noting that N26 has a "very strong demand" for its digital banking services. "The market has not been carved-up by our competitors over the past two and a half years," he claimed.
Financial Performance and Future Outlook
N26 is on track to become profitable in the second half of this year. Last year, the company halved its losses to €100 million and reported a 27% increase in revenues, exceeding €300 million. This year, N26 aims to boost revenues by up to 35%, according to Stalf.
Founded in 2013, N26 has grown to serve 8 million customers across 24 European countries. However, the company has scaled back some of its international expansion plans in recent years, exiting markets in the UK, the US, and Brazil. Initially offering current accounts, N26 has since expanded its services to include brokerage and savings accounts.
Stalf mentioned that the company has "learned a lot over the past two and a half years from the close co-operation with the regulator." He believes this experience will be "helpful for our next steps towards an IPO."
Key Takeaways
- Regulatory Challenges: N26 faced significant fines and growth restrictions due to inadequate AML controls.
- Financial Impact: Direct costs amounted to €100 million, with indirect costs potentially reaching billions of euros.
- Shift in Priorities: The company is now focusing on client profitability and market attractiveness rather than rapid growth.
- Future Outlook: N26 aims to become profitable in the second half of this year and plans to increase revenues by up to 35%.
Conclusion
N26's journey over the past few years has been marked by regulatory challenges and financial setbacks. However, with the lifting of growth caps and a renewed focus on profitability, the company is poised for a potential turnaround. As N26 continues to adapt and evolve, its experiences and lessons learned will likely play a crucial role in its future success and potential IPO.
