Challenging the Challengers: Watchdogs vs. Neobanks



If you’ve been following this blog for a while, you know that I have a high opinion of neobanks and (most) other companies working in the Fintech sphere. They don’t have the not-exactly-amazing history and long list of scandals that banks have; they don’t have that “legacy” to worry about. But, I do try to paint a fair picture. And to say that the neobanks are without issues, is also going a tad too far. Neobanks operate on having a lot of data, having good tech, both front- and backend and being quicker in using all the aforementioned to create the best customer experience. But this stuff can wrong too. And one of those things that went wrong is what we’re discussing today.


Today we’re looking into N26, a German based neobank (or digital bank if you rather), which can best be compared to Monzo or Revolut. N26 has run into several issues with BaFin, the German financial regulator. N26 has had wranglings with the regulator for the past two years, with issues being raised in 2019 when BaFin mandated N26 to remove backlogs in IT monitoring, establish written descriptions of processes and workflows, and check the identity of some of its existing customers for a second time. You might be wondering why a regular would have a keen interest in these processes and the answer is simple: money laundering. If these processes don’t run fast enough, or don’t dive deep enough, only God may know what type of money is being moved through your services. Now this was two years ago, but BaFin isn’t backing down and has reprimanded N26 again. But this round, it’s much more personal: the order for N26 to step up also comes as BaFin tightens up oversight in the wake of the Wirecard scandal, which cost the regulator's head, Felix Hufeld, his job. BaFin can’t afford to have another massive miss on their books. So what has happened so far? N26 was flagged again in May when BaFin sent in supervisors to monitor N26’s anti-money laundering procedures. Six months ago (September), N26 was fined $4.8 million for taking too long to identify suspicious transactions of clients to the regulator – not a small price to pay. As a result, BaFin parachuted a special supervisor into the bank tasked with monitoring improvements in anti-money laundering controls that BaFin has ordered and N26 has also been told to ensure that it has the adequate personnel, technical and organisational resources to comply with its obligations under anti-money laundering law. In reply, N26 says that online criminal activity has soared around the world since the start of the Covid-19 pandemic and that it is working closely with the appointed commissioner. So far so good. At least, that’s what I thought. BaFin on the other hand, is very much not impressed and has issued a growth cap on N26. The neobank was recruiting around 170,000 new customers per month, but as they couldn’t ensure that these customers were legit (according to BaFin), they have been capped at onboarding 50,000 to 70,000 new customers per month, max.

In addition to BaFin being wary of having another Wirecard scandal, its worries are justified. The cap swiftly followed N26’s latest funding round, which saw it raise $900 million and announce a new valuation of $9 billion. According to reports, this investment has now placed N26 at the forefront of the German banking world. Its valuation has grown almost three-fold since its last private funding drive, which has positioned it ahead of Commerzbank - Germany’s second-largest listed lender, with a market cap of $8.8 billion. So how did N26 reply? Well, they’re quite chill about the whole thing: they said existing customers will not be affected by the move, and the bank is keen to “lay even stronger foundations for sustainable future growth”, whilst also adding that new clients beyond the cap would be “temporarily redirected to a waiting list”. They were also keen to mention that teams have “already implemented a number of measures to strengthen governance and compliance structures over the course of this year”, whilst making sure to stress that they “don’t expect a significant impact of this temporary change on our business plan”. Right. A bunch of fluff indeed.

Don’t think just because I mentioned N26 and Wirecard on this blog that I think that this is a problem exclusive to Germany. Because it isn’t. The collapse of Wirecard was a signal to all financial regulators across the world to demonstrate stricter scrutiny of financial services companies. In the UK, where both Monzo (neobank) and the FCA (regulator) are based, the same issue arose around two years ago, when hundreds of Monzo customers complained in 2020 over their accounts being frozen without explanation, possibly due to the neobank’s own efforts to investigate suspicious transactions. Unsurprisingly, the FCA launched their own investigation into Monzo as a result of this, as it had concerns about breach of AML (anti-money laundering) practices. And it goes far beyond Europe. Several other news outlets, predominantly the financial ones, are diving deeper into which neobank is doing what, and how the regulators are responding. If N26, or any other neobank for that matter, wants to compete in the banking space, they cannot lose one of their key advantages: lack of a problematic history. They don’t have a list of scandals tied to them (yet). But if it turns out your service is being used to money launder for a bunch of criminal organisations, well, that’s going to be a massive scandal. And scandal does not a good legacy make…


Behavioural Science