How Germany’s top fintech is struggling to grow up

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In February, N26 was closing in on an acquisition that would finally allow it to offer equities trading to its 8mn clients.

For Germany’s most valuable fintech, buying Dutch online broker Bux for €200mn in shares would be the next step in making good on its ambition to “do for finance what Spotify did for music”.

But after N26 pushed for new terms and a lower price Bux walked away, people with direct knowledge of the matter told the Financial Times.

Some pinned the blame on 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 tried to be opportunistic,” one person said, adding that he “left scorched earth”.

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

As recriminations over the aborted deal fly, the episode has done little to allay concerns over N26’s strategic planning, its leadership and governance just as fintechs face rising interest rates threatening their supply of ready cash.

With Allianz, one of its largest shareholders, seeking an exit at a steep discount, persistent losses and a regulatory crackdown stymying growth, N26’s vaulting ambition to disrupt the established banking order in Europe faces its greatest threat since Max Tayenthal and Stalf founded the company a decade ago.

N26, Stalf and Bux declined to comment on any potential merger talks. N26 stressed that each M&A decision involved the executive and supervisory boards: “Individual decisions by any N26 employee — including the CEO — are therefore not possible.”

Bumps in the road

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

The bank operates in 24 countries across Europe, including Germany, France, Spain and Italy. Its goal is to woo young professionals in the hope that they will buy more products as they get richer, challenging established retail giants like 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 vouchsafed it close to $1.8bn, including $900mn during its last funding round in October 2021 when it was valued at $9bn.

A Bux trading page on a mobile phone
A Bux trading page on a mobile phone

But despite its award-winning app, N26 has struggled to offer some relatively basic products. The bank still does not provide equities trading and, one year after the ECB started to hike rates, N26 does not have the tech in place to pay interest on overnight deposits.

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

Insiders argue that the delays are not a long-term setback as the latest retail trading boom won’t be the last one and N26 clients are highly loyal. It also started offering crypto trading earlier this year.

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

N26 also abruptly exited the UK and the 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.

More recently, Allianz has been offering its roughly 5 per cent stake for sale at a valuation of $3bn, 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 governance and decisions by the firm’s founders.

In February 2022, six senior executives accused Stalf and Tayenthal of “behavioural problems” including establishing a “culture of fear and blaming”.

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

“He built N26 from scratch, but he does not understand that his role has to change,” this person said, pointing to the size and complexity of N26. Three of the six executives who signed the memo stating their complaints have left over the past year, with a fourth having announced his intention to depart as well. N26 told the FT that the departures have been for “very different reasons”.

Stalf and Tayenthal declined to comment on the matter. N26 told the FT that it ensures “N26 employees feel heard and valued”. The group also said that 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, say insiders, and sped up efforts to address the issues. Others argue that the real issue is “weak internal governance that fails to balance” the influence of the co-founders.

One person familiar with the internal workings of N26 said investors and board members should shoulder more responsibility for strengthening governance.

N26 said it had achieved “several significant milestones around corporate governance, resourcing and internal structures in the last 12 months”.

The bank in late 2022 introduced a supervisory board led by Marcus Mosen — a payments industry veteran and early N26 investor. “Marcus is a smart guy, but he does admire Valentin and Max,” said one insider, adding that this combined with potential conflicts of interest from his role as a shareholder may weaken his clout.

Mosen told the FT that while he had “great respect for founders 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.

Leashed by the watchdog

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

Starting in 2018, BaFin has been rounding on N26’s internal organisation and money-laundering controls. In 2021 it imposed a €4.25mn fine, parachuted in a special monitor and, in an unprecedented move, decreed that the lender could only accept 50,000 new clients per month, compared to 170,000 clients previously.

“The growth cap is really hurting,” says one early N26 investor, adding that the bank has been persistently over-optimistic about how long this would stay 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 this year, say insiders. BaFin declined to comment.

Valentin Stalf, left, and Max Tayenthal
Valentin Stalf, left, and Max Tayenthal founded N26 a decade ago © APA-PictureDesk GmbH/Shutterstock

Despite some blunders, N26 got a key issue right: its 2021 funding. The bank had to woo investors with a guaranteed minimum return of 25 per cent, but the round was big and well-timed right at the peak of tech mania.

However, that equity buffer cannot last for ever and the bank’s promise to break even before it needs to raise new funds is looking increasingly hard to reach. Annual net losses, which the most recent available data gave as €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 burnt 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 from the last funding round” by the time it hits profitability, compared to €700mn at the end of 2021.

The bank recently shelved plans to issue €110mn in hybrid bonds to beef up its regulatory equity and improve its capital structure, the people familiar with the matter said. Not only have hybrid bonds become more expensive following the collapse of Credit Suisse, but one of the people stressed that the bank just did not need additional capital at this point.

N26 declined to comment on its 2022 financial performance and its capital plans. It told the FT that it was “well-financed, independent of external capital, and . . . able to reach profitability without additional funding”, 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 mulling limited lay-offs to cut costs.

“We have good unit economics and we have just a fraction of the cost of other banks [per client],” said Tayenthal. “Right now, some of the new products we launched and the rise in interest rates has helped as well.”

The early N26 investor also remains optimistic about its 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 multiple challenges: “What story do you want to tell to investors next time?” said someone close to the company.

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