N26, the Berlin-based digital banking app, has successfully navigated through years of regulatory scrutiny from Germany's financial watchdog, BaFin (via TechCrunch).
BaFin has recently announced the lifting of growth restrictions imposed on the fintech company, effective June 1, 2024. This development follows a challenging period marked by compliance improvements, financial penalties, and strategic shifts.
Regulatory Scrutiny and Growth Cap Against German Fintech Companies
In the wake of the Wirecard scandal, which involved corrupt practices and fraudulent reporting that led to the insolvency of the German payment processor Wirecard, BaFin intensified its oversight of fintech companies, including N26.
In 2021, the regulator imposed a cap limiting N26 to 50,000 new customer sign-ups per month, a drastic reduction from the company's previous average of 170,000. This cap was slightly increased to 60,000 new customers per month in late 2023 but continued to hamper N26's rapid expansion plans.
The restrictions were implemented due to deficiencies in N26's anti-money laundering (AML) controls. BaFin's actions were aimed at ensuring the bank improved its processes for detecting and reporting suspicious activities.
Massive Fines and Compliance Investments
As part of concluding the oversight period, BaFin fined N26 €9.2 million (approximately $10 million) for failing to promptly file suspicious activity reports in 2022. This was not the first fine; in 2021, N26 was fined €4.25 million for similar compliance issues.
Anticipating these regulatory challenges, N26 had already set aside provisions in its 2022 financial statements. The company also invested €100 million to bolster its compliance team and enhance monitoring systems. Despite these efforts, the direct and indirect costs of the regulatory actions have lowered the company's valuation.
BERLIN, GERMANY - AUGUST 30: A woman walks past a billboard advertising German internet bank N26 on August 30, 2021 in Berlin, Germany. BaFin, the German finance sector authority, has since 2019 repeatedly warned N26 to improve its vulnerability to fake account openings that are being used for money laundering and has more recently appointed a special inspector to investigate the bank. Photo by Sean Gallup/Getty Images
N26's Strategic Shifts and New Offerings
In response to the regulatory constraints, N26 shifted its strategic focus from aggressive growth to enhancing services for its existing customer base, TechCrunch reports.
The company introduced several new financial products, including savings accounts, personal loans up to €25,000, and partnerships for crypto and stock trading. These additions aim to increase the average revenue per user.
Moreover, N26 has expanded its offerings to include insurance products, further diversifying its revenue streams. These strategic moves are part of N26's broader goal to achieve monthly profitability by the second half of 2024.
Despite the challenges, N26's financial performance has shown resilience. In 2023, the company reported a loss of €100 million, a significant improvement from previous years, Financial Times reports. Revenues increased by 27% to over €300 million. Looking ahead, N26 aims to grow its revenues by up to 35% in 2024, driven by higher interest rates and the end of the growth cap.
The company serves 8 million customers across 24 European countries, though it has withdrawn from markets in the UK, US, and Brazil in recent years. This strategic retreat has allowed N26 to consolidate its operations and focus on profitability.
