The cautionary tale of fintech N26
N26 vs Revolut and Monzo
Two young men had a dream. In 2019, Valentin Stalf, the co-founder of the German neobank N26, told TechCrunch, “I think we have the opportunity to really build a business with a hundred million customers globally.” In 2018, Revolut said it was targeting 100 million users. Today, N26 has around 5 million customers. Last year, having reached 50 million customers, Revolut co-founder Nik Storonsky once again emphasized his ambition to hit 100 million customers.
This week, Valentin Stalf announced he was standing down as co-CEO of N26 after turmoil with regulators and investors, while Storonsky’s grip over Revolut has never been so strong.
So, what happened?
The origin story
N26 was one of the first of Europe’s neobanks to launch. They were founded in Berlin in 2013 and secured a banking license in 2016. In the early days of neobanks, N26 was seen as a major potential competitor to the UK neobanks, and they were regularly on panels together at VC-type conferences. In the following TechCrunch panel, Valentin Stalf of N26 is with Tom Blomfield, the founder of Monzo, and Nik Storonsky, the co-founder of Revolut. Building thttps://www.youtube.com/watch?v=ncWRe-JIWRshe bank of the future with Monzo, N26, and Revolut | Disrupt Berlin 2017 - YouTube
The panel is a fascinating glimpse of the early days of the competitive tension between the new fintech upstarts. The 20-minute panel is dominated by Stalf and Blomfield, who (in between their bromance) talk a lot but without conviction about their competitive advantage. They have more geographic focus, and Stalf talks about how N26 is looking to solve all the traditional pain points in banking, without specifics. Storonsky, as usual, is a man of few words, but is clear on his focus when he opens his mouth. He says he is the only neobank offering customers interbank rates on currency changes, he is launching in numerous new countries at one go, and expanding into adjacent products like crypto. Both Stalf and Blomfield see these as small niche markets and don’t feel the same urgency for geographical expansion. A lot of lessons here that rhyme with Clayton Christensen’s The Innovator’s Dilemma.
Having raised $160m in a Series C funding round in 2018 at a sub $1bn valuation, N26 raised more than $500m in its Series D in three tranches over 2019 and 2020. The first tranche in January of 2019 gave N26 a valuation of $2.7bn, with customer numbers growing fast. By 2020, the valuation was $3.5bn, but it was in the VC fever of 2021 that things skyrocketed and N26 raised $900m at a valuation of $9bn. In total, N26 raised over $1.8bn from funding rounds.
That’s when things started to unwind. The German regulator BaFin had been looking into N26’s lax AML procedures since 2018/19 BaFin 2019, and finally got fed up. They fined N26 €4m, added a special monitor within the neobank, and most importantly capped its ability to take on new customers to 50,000 per month, well below the 170,000 N26 had been taking in at the time. N26 told the new investors this would be sorted in 6 months, but the caps and the special monitor stayed for two and a half years, a period in which Revolut was expanding rapidly across Continental Europe.
BaFin - Press release - N26 Bank GmbH: Order to prevent money laundering and terrorist …
BaFin - Press release - N26 Bank GmbH: BaFin orders measures to limit growth and appoints a …
N26 welcomes BaFin’s lift of its growth restriction
N26 vs Revolut and Monzo
N26’s valuation briefly pulled ahead of Revolut at the start of 2019, but later that year, Revolut raised money at a $5.5 billion valuation, and when N26’s valuation surged in 2021, so did Revolut’s to $33 billion. Monzo’s valuation was around the same as N26, in 2019, and the business has recovered in recent years after a tough 2020.
Even before BaFin’s action, N26’s customer growth lagged behind Revolut and Monzo. By 2019, Revolut already had four times as many customers as N26 and Monzo, despite being a one-country company pulled ahead by 2020. Today, Revolut has 60 million customers, including more than 12 million customers in the UK and 4-5 million in most major European countries. By contrast, N26 only has around 5 million paying customers across its 24 European markets (75% of them are in Germany, France, Italy, and Spain), which is less than half of what Monzo has in the UK alone.
N26 management highlighted that it had used the constraints of the new customer cap to focus on building deeper customer relationships. Its average deposit size at just over €2,000 may be 3x of Revolut and 30% higher than Monzo, but it is less than a quarter of a neobank like Chase UK, which has focused on deposit base rather than customer numbers. The overall deposit base growth has materially lagged peers Revolut and Monzo.
The lacklustre customer growth also shows itself in transaction volumes, which have doubled over the last 3 years for N26, while this has increased fivefold at Revolut. Moreover, there was no acceleration in transaction volume growth for N26 in 2024. N26 had been a relatively well-diversified business with revenues divided equally between card interchange fees, subscriptions/premium products, and interest income. But with interest rates rising, the latter has continued to increase in importance and is today twice the proportion seen at Revolut and almost as much as Monzo.
Unsurprisingly, revenue growth at N26 has materially lagged both Revolut and Monzo since 2021 (around half the growth rate), and so have profits.
In the 2017 panel, which I referenced earlier, Valentin Stalf of N26 talks about how legacy retail banks didn’t so much have a revenue problem as a cost problem. N26, on the other hand, had nimble infrastructure and could scale faster, he believed. Alas, they had to spend €100m to improve their AML processes, lost almost €1bn over the last 6 years, and are barely breakeven at a time when legacy retail banks in Europe are generating huge profits.
Moreover, although N26’s profitability has lagged Revolut and Monzo, its headcount is around 1,500 since 2021, while Revolut and Monzo’s have doubled over this period to more than 10,000 and 4,000 employees, respectively. This reflects the massive operational leverage that the faster revenue growth at these competitors has offered in recent years. With lower growth and a higher starting point in terms of cash burn, N26 has been forced to scale back in many areas. In 2020, N26 exited the UK after spending tens of millions of euros and failed to gain traction. In 2022, it exited the US, a market it once highlighted as a huge opportunity. In 2023, it exited its Brazilian operations.
My latest pieces on the UK neobank’s financial results are:
Lessons from N26
Risk and compliance matters
Banks are different, and as fintech’s scale regulators turn attention to them more like banks than software vendors. This is an alien world for their typical venture capitalist shareholders, who are looking for growth and a Silicon Valley move fast and break things attitude. In areas like risk and compliance, traditional banks are used to getting fines in the hundreds of millions of dollars and sometimes billions of dollars, many years after the event.
The catch-up in investment in risk and compliance is not unique to N26, with Starling getting into trouble over poor risk management of bounceback loans and lax AML procedures, and Revolut and Monzo also facing challenges. But rather than the customary nature of regulators to regulate in the rear-view window, BaFin appears to have been more muscular in its regulation.
Headline valuation is not everything
The Financial Times reported recently that the N26 co-founders, as part of their agreement to stand down and give up their special voting rights, were trying to renegotiate guaranteed returns to their shareholders…
Given N26’s financial profile and the fact that BaFin is still not happy with them, it is likely that the N26 valuation is lower today than in 2021. The 2021 guaranteed returns on the new money would have been hugely dilutive to the existing shareholders in the format agreed. No wonder the co-founders are willing to step away rather than see their stake disappear.
The VC-run world loves to talk about private valuations as equivalent to stock market valuations, but as Bill Gurley wrote in his early 2016 essay “On the Road to Recap - Why the Unicorn Financing Market Just Became Dangerous…For All Involved,” don't take a dirty term sheet.
“Take a clean round at a lower valuation. This will seem like a massive failure to many modern entrepreneurs, but they should quickly adjust their thinking. Reed Hastings at Netflix raised money in a high-profile down round as a public CEO. Every single public CEO has had days where the stock price falls — it is common and accepted. The only thing you are protecting is image and ego and in the long run they absolutely do not matter. You should be more concerned about the long-term valuation of your shares and minimizing the chance that you have the whole thing taken away from you. Terms are the true Godzilla that should scare you to death. A down round is nothing. Get over it and move on.”
Clear product differentiation is necessary
Watch again Nik Storonsky’s few words in that 2017 panel, and you can see his razor-sharp focus on FX rates as his calling card and offering other things his young customers wanted from crypto to stocks. When I spoke to TS Anil of Monzo, he understood the value his users get from his financial planning functionality. Chase UK understood that they had to offer things like cash back and superior savings rates. Where N26 moved, it was often the last mover, and undifferentiated. It was late to both equity and crypto trading, launching them many years after Revolut and others. In its home market of Germany, online broker Trade Republic has built a large footprint, mostly in the last 5 years. At 8 million customers, Trade Republic is more than twice the size of more established players like Comdirect, albeit with slightly lower assets under management
Credit is hard in developed markets
Like its UK neobank peers, N26 has struggled in lending given the amount of competition from traditional banks and a different skill set in terms of risk management vs more fintech products. The German banking market is also the polar opposite of, for example, Nubank’s home Brazilian market. Germany is much competitive with many more players, lower existing industry margins, low interest rates, and a high degree of regulation.
Founder Mode vs Manager Mode
So, Nik Storonsky is now one of the last of the larger European neobank CEOs. The transition from founder mode to manager mode at Monzo helped save the company and turned around its fortunes. TS Anil was able to professionalise risk, compliance, and governance, and also attract more deposits and improve the Monzo product and platform. Could a manager-mode CEO do the same at N26, or is it too late for the German neobank?