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October 26, 2021

Neobank N26 eyes IPO, but must fix its money laundering problems first

By Eric Johansson

German fintech N26 plans to go public, is shopping for a new US banking partner and is bullish about its ability to outcompete its rivals on the back of a $900m Series E round. But first it must convince regulators that it is doing everything it can to prevent financial crimes.

The challenger bank has been rumoured to be heading for an initial public offering (IPO) for some time. A thematic research report from GlobalData recently named it as one of the tech unicorns most likely to head for a public float in the next two years. And it seems as if an IPO really is in the cards for N26.

“Our teams are currently focused on laying the foundations for a public listing in the coming years, and we will continue to remain close to our investor community during this journey,” an N26 spokersperson tells Verdict.

This adds to co-CEO Maximilian Tayenthal’s recent comments that he expects N26 to be “structurally IPO-ready” within the next 12 to 18 months. Although he added that he’s in no rush to float.

The German neobank has reason to bide its time. True, the recent funding round pushed the digital lender’s valuation past the $9bn mark, which made it the highest valued privately owned fintech company in Germany. The cash injection will go towards improving the business’ position in the market.

“This round will allow us to continue to accelerate towards improving our product, processes and scaling our teams to deliver an even better banking experience for millions of customers,” the spokesperson says.

However, N26 is also facing several challenges which could delay the IPO. N26 is currently in the midst of overcoming obstacles such as growing competition, finding a new US banking partner and dealing with regulators who are currently forcing it to slow down the growth of the N26 user base until it’s fixed its money laundering problem.

Let’s start with N26’s competitors. In Europe alone the neobank is facing off against the likes of Danish Lunar Bank and Britain’s Revolut, which recently joined the elite tridecacorn club after achieving a $33bn valuation on the back of a $800m funding round in July.

Despite the stiff competition in the sector, N26 is confident in its ability to cut out a slice of the market for itself.

“Rather than seeing the future of banking as a winner-take-all game, we believe that clear frontrunners in different regions are emerging,” the spokesperson says. “With pioneers like us continuing to set new standards for our industry, growing responsibly and sustainably is particularly important to N26.

“We were one of the first in our industry to get a banking license back in 2016, and are now on track to become a financial holding company. N26 takes our responsibility as a fully regulated bank very seriously as we know how important the trust of our customers is.”

Like many of its European rivals, N26 has also made forays into the States, having officially launched across the pond in August 2019.

“The US has always been an important part of N26’s global strategy and we continue to be on track to achieve our long term ambitions,” the N26 spokesperson says.

Growing a digital bank in the US is a complex undertaking due to the nation’s many different state regulations and federal laws. Applying for a banking licence, for instance, can take many years. Varo Bank famously waited over three years and suffered through several application rounds before it was approved for its licence in 2020.

Failing to adhere to these rules could have consequences. The California Department of Financial Protection and Innovation ordered Chime to stop referring to itself as a bank in May as it doesn’t have a banking licence.

Many neobanks that haven’t secured their own US banking licence are reliant on local partner banks to be allowed to operate in the country. In N26’s case, that’s been Axos Bank, a bank accredited by the Federal Deposit Insurance Corporation (FDIC). But now the challenger bank is shopping for a new partner.

“Our current priority is transitioning to a new partner bank, a move that many US-based fintechs have made as they grow in the market,” the N26 spokesperson says. “Continuing with a new partnership with an FDIC insured bank will give us the infrastructure and ability to deliver the N26 banking experience our customers know and love, while offering greater flexibility to build even more innovative products in the future. Our goal is to double down on product innovation and differentiation to deliver an even stronger product for US customers once our migration to a new partner bank is complete.”

Speaking of regulations, the scaleup suffered a big setback in September when German regulator BaFin slammed N26 with a €4.25m ($4.98m) fine.

The financial markets watchdog criticised the neobank over delayed anti-money laundering (AML) reports on suspicious activities between 2019 and 2020. N26 has paid the fine.

Last week it was revealed that BaFin has also capped N26’s ability to onboard new users to 70,000 each month – down from its regular average of 170,000 – until the digital bank has fixed its AML issues. N26 currently has seven million customers in the US and in Europe.

“N26 has implemented a number of measures to significantly strengthen our anti-money laundering and financial crime prevention approach,” the N26 spokesperson says.

These measures include growing its in-house Anti-Financial Crime Team to ensure compliance and committing to invest “more than €25m in combating money laundering and making sustainable progress in curbing online fraud this year.”