N26: Racing for Differentiation

N26, founded in 2013 within Rocket Internet incubator in Berlin, prides itself on being the first fully digital bank which kick-started the Neo-bank trend now worth USD$47 billion globally. From the beginning, founders Valentin Stalf and Maximilian Tayenthal shared a goal to make customers’ personal banking experience functional, enjoyable and beautifully designed, with a focus on providing a minimalist mobile application and debit card.

N26 follows a mixed strategy when entering new markets, however it has always remained focused on providing improved and more efficient banking services to its customers. Within just 10 months of launching in 2015, N26 applied for a banking licence with the European Central Bank, which the company then received in July 2016. This is unique to N26’s journey to becoming a bank, as competitors Monzo and Revolut established themselves first and foremost as FinTechs, only later obtaining a banking licence in order to scale.

The licence gave N26 access to increased sources of revenue, and the Bank immediately launched N26 Invest through a partnership with vaamo, opened up to 17 new European countries within the following 6 months, and introduced consumer credit in early February 2017. This strategy enabled N26 to offer credit 2 years before Monzo, and 5 years before Revolut, giving the company a significant head-start when it came to capturing the interest income from borrowers looking for alternatives to credit agencies and traditional banks.

Despite this head-start, N26 has struggled to keep up with Monzo and Revolut, and in 2019 (Year 4 on graph) it began to lag behind both. In an effort to diversify its customer base, between 2018 and 2019, N26 launched in the UK and the US, continued expansion throughout Europe to reach presence across 26 different countries, as well as an increased spending on marketing, starting with the provocative N26 #nobullshit campaign. These initiatives proved fruitful, as N26 experienced a growth spurt doubling its customer base.

N26’s latest annual report for 2020, published in February this year, shows that the company also diverges from competitors when it comes to income breakdown. Despite launching loan products before competitors, N26 reports that just £15 million comes from interest income, 21% of total income. This is significantly different to the case for Monzo, which earned 68% of its operating income from interest.

N26 offers a variety of different subscription plans, a deliberate monetisation strategy which provides the bank with a more consistent source of revenue based on recurring payments, and reduces its dependence on interest (i.e. irregular consumer spending which cannot guarantee the same profits from overdraft or credit each month). Subscription plans represented 45% (€43.9 million) of total commission income in 2020, whereas for Revolut, this was just 29%. With this business model, N26 attracted fresh funding in October 2021, pushing its valuation to $9 billion and proving that chasing sustainable growth can be just as effective as demonstrating growth spurts.

Subscription income plays a key role in N26’s revenue streams, and so it is surprising to see that the Bank’s accounts for Business are lacking in a Unique Selling Proposition that sets it apart from players. Despite offering insurance, a hotline and cashback, N26 has not integrated Quickbooks, Xero or any other accounting service for the freelancers it targets. The Business subscriptions closely resemble the Personal subscriptions, and instead of advertising services to a wide range of customer profiles such as freelancers, SMEs and Start-ups (such as Revolut) N26 prides itself on offering deeply personalised banking experiences, whereby each subscription differs only slightly, but allows for a more diverse and flexible range in pricing.

As discussed in C-Innovation’s blog on Neo-banks’ rush for international expansion, Revolut’s Business offering in the United States will give the company an advantage over local Chime, which exclusively provides to retail customers. In the case of N26, the FDIC’s longstanding mission to facilitate access to credit for SMEs could have given it a window of opportunity not yet seized by competitors Chime, Monzo or even Revolut. Had N26 expanded its target beyond freelancers and combined this with its expertise as a lender, its credit offering would have attracted customers who remain underserved.

Instead, N26 remained focused on improving the “poor” mobile banking experience in the US, as it had done for Europe. Despite this, when the FDIC released its annual household survey in 2019, it found that in the US almost all banked households were in fact satisfied with their primary bank (97.3%) and thought that fees were clearly communicated (92.1%), suggesting little desire to change banks in the interest of fee transparency. Misleading market research or lack thereof may have contributed to N26’s departure from North America, which seemed premature and salvageable.

Since leaving the UK and the US, N26 has recommenced its expansion to Brazil in South America, part of a plan originally made in 2019 and temporarily put on hold due to the Covid-19 pandemic. Resistant to numerous setbacks, which is covered in the recent C-Innovation report, N26 continues to target new geographical markets. Interestingly, the Bank is most popular in France, where customers account for 27% of total users and outnumber those in Germany, N26’s home turf. In Brazil, market competition is significantly higher than in the UK or US, and N26 will have to count on the low smartphone adoption rate of about 55% for its success that it must share with 40-million-customers-strong Nubank, as well as C6 Bank and Banco Inter.

Expansion is not N26’s only strategy, and it proved itself adaptable to new market trends since launching ‘N26 Installments’ in response to the growing popularity of ‘Buy Now, Pay Later’ solutions.

More risk-averse than competitors like Monzo and BNPL veteran Klarna, N26 has a stricter eligibility criteria that only allows customers who can prove they can afford the purchase (by initially paying in full) to use ‘N26 Installments’. This minimises the Bank’s losses from unpaid loans.

As N26 ventures to new horizons and introduces new products, it plans to put its latest pool of funding towards trading and cryptocurrency services to customers, a project that takes precedence over working towards an Initial Public Offering. The company claims to be structurally IPO ready by 2022, but that this won’t be on the cards until 2024. Given that N26 has given little to no indication of its financial standing over the 2021 financial year, it is impossible to say whether or not these are realistic predictions, not to mention N26’s progress in reaching 100 million customers worldwide in the coming years, however investor confidence is a good sign for the Bank’s future.

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