N26’s identity crisis: How Germany’s best fintech struggles to grow up

In February, N26 approached an acquisition that would finally allow it to offer share trading to its 8 million customers.

For Germany’s most valuable fintech, buying Dutch online broker Bux for €200m in shares will be the next step in fulfilling its ambitions to “do for finance what Spotify did for music”.

But after N26 pushed for new terms and a lower price, Bux told the Financial Times.

Some blamed N26 co-founder and co-chief executive Valentin Stalf, saying he had tried to exploit Bux’s appetite for a deal after a delayed funding round. “Valentin was trying to be opportunistic,” one person said, adding that he “left the scorched earth”.

Others disagreed, arguing that N26 had become concerned about how much revenue Bux was generating from controversial contract-for-difference trading, which left retail investors exposed to heavy losses.

As accusations about the aborted deal fly, the episode has done little to quell concerns over N26’s strategic planning, its management and governance, just as fintechs face rising interest rates that threaten their access to cash.

With Allianz, one of its biggest shareholders, seeking an exit at a deep discount, persistent losses and a regulatory crackdown stifling growth, N26’s ambition to disrupt the established banking order in Europe faces its biggest threat since Max Tayenthal and Stalf founded the company. ten years ago.

N26, Stalf and Bux refused to comment on any merger talks. N26 stressed that every M&A decision involved the board and supervisory board: “Individual decisions by any N26 employee – including the CEO – are therefore not possible.”

Bumps in the road

N26’s smart smartphone app has convinced many of its customers to pay up to €16.90 a month for premium services, including a smart metal credit card and travel insurance.

The bank operates in 24 countries across Europe, including Germany, France, Spain and Italy. The aim is to woo young professionals in the hope that they will buy more products as they grow wealthier, challenging established retail giants such as Deutsche Bank, BNP Paribas and Santander.

N26 counts Peter Thiel’s Valar Ventures and Li Ka-shing’s Horizons Ventures among the investors who have underwritten it close to $1.8 billion, including $900 million during the last funding round in October 2021 when it was valued at $9 billion.

But despite its award-winning app, N26’s has struggled to offer some relatively basic products. The bank still does not offer share trading, and a year after the ECB started raising interest rates, N26 does not have the technology in place to pay interest on overnight deposits.

The bank said in a statement that it will “launch interest-bearing savings this quarter”, adding that an “N26 trading product” will go live “within the next 12 months”.

Insiders claim the delays are not a long-term setback as the latest trading boom will not be the last and N26 customers are very loyal. It also started offering crypto trading earlier this year.

Asked about the delays, Tayenthal told the FT: “Am I always happy [with] how do we proceed? I’m not. But I am still proud of what we have achieved.

N26 also abruptly left the UK and US in 2020 and 2021 and has missed its own targets – saying in its latest available annual report that in 2021 it “performed below plan”. Tayenthal admitted in early 2022 that it had expanded too quickly.

Recently, Allianz has offered its around 5 percent stake for sale at a value of $3 billion, the FT has reported.

Founder syndrome?

The scale of the company’s ambition meant that growing pains were inevitable. But some say they have been exacerbated by poor management and decisions by the firm’s founders.

In February 2022, six senior executives accused Stalf and Tayenthal of “behavioral problems” including creating a “culture of fear and blame”.

“Valentin is the biggest problem,” a former senior manager told the FT. Another claimed that Stalf had a habit of “constantly overriding other people’s decisions”.

“He built N26 from scratch, but he doesn’t understand that his role needs to change,” this person said, pointing to the size and complexity of N26. Three of the six executives who signed the memo stating their grievances have ended in the past year, and a fourth has announced his intention to leave as well. N26 told the FT that the departures have occurred for “very different reasons”.

Stalf and Tayenthal declined to comment on the matter. N26 told the FT that it ensures “N26 staff feel heard and valued”. The group also said it reduced staff turnover to between 10 and 15 per cent per year, below the industry average of 20 to 35 per cent.

Stalf and Tayenthal took the criticism seriously, insiders say, and accelerated efforts to resolve the issues. Others argue that the real problem is “weak internal governance that fails to balance” the influence of the co-founders.

A person familiar with the internal workings of N26 said investors and board members should take more responsibility to strengthen governance.

N26 said it had achieved “several significant milestones around corporate governance, resources and internal structures over the past 12 months”.

In late 2022, the bank introduced a board of representatives led by Marcus Mosen – a veteran of the payments industry and early N26 investor. “Marcus is a smart guy, but he admires Valentin and Max,” said an insider, adding that this combined with potential conflicts of interest from his role as a shareholder could weaken his influence.

Mosen told the FT that while he had “great respect for entrepreneurs in general, this respect should not be confused with what my role entails”, including challenging Stalf and Tayenthal. He denied any potential conflict of interest.

In a leash of guard dog

However, it could be an escalating battle with Germany’s financial regulator that presents perhaps fintech’s biggest problem.

As of 2018, BaFin has reviewed N26’s internal organization and money laundering controls. In 2021, it imposed a fine of 4.25 million euros, parachuted into a special monitor and, in an unprecedented move, decided that the lender could only accept 50,000 new customers per month, compared to 170,000 customers previously.

“The growth ceiling is really painful,” says an early N26 investor, adding that the bank has been persistently over-optimistic about how long this will remain in place. Initially hoping to get a relaxation within six months, it now looks increasingly likely that the measure will remain at least until the end of the third quarter of this year, insiders say. BaFin refused to comment.

Despite some missteps, N26 got one key thing right: the funding in 2021. The bank had to woo investors with a guaranteed minimum return of 25 percent, but the round was big and well-timed right at the peak of the technology craze.

However, this equity buffer cannot last forever, and the bank’s promise to break even before it needs to raise new funds is looking increasingly difficult to achieve. Annual net losses, which the latest available data put at €172mn in 2021, were north of €180mn in 2022. In the internal business plans, profitability is only envisaged in the second half of next year, according to people familiar with the matter. . By then, most of the equity raised in 2021 will have been burned through or tied up in additional regulatory capital, these people warned.

N26 told the FT that it would have “several hundred million euros in equity left over from the last funding round” when it reaches profitability, compared to €700 million by the end of 2021.

The bank recently shelved plans to issue 110 million euros in hybrid bonds to bolster its regulatory capital and improve its capital structure, people familiar with the matter said. Not only have hybrid bonds become more expensive since the collapse of Credit Suisse, but one of the people stressed that the bank just didn’t need additional capital at this time.

N26 declined to comment on its financial results for 2022 and its capital plans. It told the FT that it was “well funded, independent of external capital, and . . . able to achieve profitability without additional financing”, adding that it has been profitable for several years on a per-customer basis.

Tayenthal told the FT that the bank’s plans remained on track. “At some point in 2024, we will be operationally profitable,” he said. According to insiders, the bank is currently considering limited layoffs to cut costs.

“We have good unit economics and we only have a fraction of the costs of other banks [per client]”, Tayenthal said. “Right now, some of the new products that we launched and the rise in interest rates have also helped.”

The early N26 investor also remains optimistic about the future, despite plans for an initial public offering being put on the back burner.

Should N26 eventually pursue an IPO, its pitch will depend on how it handles this year’s many challenges: “What story do you want to tell investors next?”