Berlin-based challenger bank N26, which counts 7 million customers globally, is doubling down on the U.S. market as a beachhead for its international expansion plans.
The company plans to grow its U.S. employee base by 75%, said Alex Weber, N26’s chief growth officer. The U.S. hires are part of the neobank's plan to add 200 employees overall this year, and boost its product and technology capabilities — and, hopefully, its U.S. client load, too. N26’s New York office, where its U.S. operations are based, has 60 employees.
The neobank is also recruiting a new U.S. CEO after Nicolas Kopp stepped down last year.
"When you look at the majority of where the deposits lie or the majority of where customers still bank today, you will still find out that — even though Chime is growing — the proportion of customers doing banking with traditional banks is still huge, and that's true in most of our markets," Weber said. "There is a huge opportunity from both just offering a simpler and better product, to a different and more modern brand, and having just a very different communication and style of solving customers’ problems."
The company launched in the U.S. in 2019 and claims to have picked up 500,000 U.S. customers as of August 2020.
Despite competition, the company said it sees the U.S. as fertile ground for growth but by no means a winner-take-all market.
N26, which shuttered its U.K. operations last April amid Brexit challenges and reports of low user engagement, is playing catch-up with U.S.-based neobanks. Chime, for example, reportedly serves 12 million users. Varo, which obtained a national bank charter in July, counts nearly 2 million customers. Current, which also has 2 million users, claims to have doubled its user base over six months during the pandemic.
N26 offers a free account for U.S. users, including personal finance management tools, access to a fee-free ATM network, early paycheck deposits and cash-back rewards. The company plans to enhance these offerings and said it is considering adding lifestyle-oriented subscription bundles for U.S. customers, similar to what it offers its European customers.
"I think a big focus for 2021 [in the U.S.] is enabling a lot of those kind of table stakes [offerings], more focused on 'money in and money out' of the account; how you connect with all the payment schemes that you need — all the things that are basic to some extent but can always be improved," Weber said. "And then really building out on that debit-card-first proposition linked with signature user experiences."
N26 is also assessing which types of additional offerings would resonate with U.S. users based on user feedback, Weber said. N26 offers cash-back partnerships with some U.S. consumer brands, including HelloFresh, Headspace and Tidal.
N26, which partners with Axos Bank in the U.S., generates revenue from transactions. Subscriptions would add another revenue source, but PayGility Advisors partner David True suggests an overreliance on interchange fees is a risk.
"Interchange is building a castle on sand," he said. "If your business model is only dependent on that, it's not a long-term business. You have no control over interchange, and the card networks could modify that any time they think it’s better for their business."
From N26’s perspective, the company sets itself apart on lifestyle-based perks that are paired with banking offerings. In Europe, for example, N26 metal-tier customers — who pay €16.90 ($20.25) per month — have mobile-phone insurance; discounts with such companies as WeWork, Hotels.com and GetYourGuide; travel medical insurance and assistance; priority customer support and other benefits.
Standing out from others in the field will be crucial to advance its growth trajectory, analysts said. N26 reported $131.7 million in net losses from its European operations in 2020. This compares with $197.5 million in net losses from its continental Europe markets in 2019.
"Of the bank’s major mistakes, the biggest has been to pursue an undifferentiated strategy toward multiple different markets. Its mile-wide, inch-deep approach has failed to take as many customers as Revolut’s more tailored proposition, while competition in more crowded markets, such as the U.K., has forced out N26 altogether," Katherine Long, a banking analyst at GlobalData, said in a statement.
N26, which in 2019 invested $29.9 million toward U.S. expansion efforts, said it aims to reach break-even status by the end of the year. The path toward profitability will involve adding revenue streams through new offerings, rethinking some of its existing offerings that were dependent on travel, and continuing to scale internationally, Weber said. The company is building its presence in new markets, and recently obtained a banking license in Brazil.
On the product front, N26 said it plans to roll out a "marketplace model" this year, beginning in Europe, that will allow N26 to offer partner products, including potentially trading, credit and other enhancements to the digital banking experience. The company, which recently hired a new chief financial officer and chief people officer, is on the hunt for an acquisition, according to CNBC.
"There are different ways to look at M&A," Weber said. "There is a little bit of an acquisition kind of consideration in international expansion in new markets. ... The other is, what are some of these adjacent kinds of businesses that could be super relevant to the core experience?"
As for rumors of an IPO, N26, which has so far raised €800 million ($957.6 million), said it’s not an immediate objective.
"We’ve been working for a couple of years in the background to get a couple of things ready, like International Financial Reporting Standards reporting and all the different things that you need to do," he said. "[We’re] definitely getting ready for it, but obviously it's not in the next 10 to 12 months."
