N26 Regains Growth Potential as Regulatory Cap is Lifted

N26, the German fintech company, is set to resume its growth trajectory after years of regulatory restrictions that have significantly impacted its valuation. The company revealed that the German financial regulator BaFin will lift a cap on new client sign-ups starting in June, allowing N26 to accept more than the current limit of 60,000 new clients per month.

In 2021, BaFin imposed a restriction on N26, limiting new client sign-ups to 50,000 per month due to inadequate anti-money laundering (AML) controls. This cap was a substantial reduction from the 170,000 monthly sign-ups N26 previously averaged. Despite an increase to 60,000 last year, the limit stunted the bank’s growth and affected its valuation.

N26’s co-founder Valentin Stalf disclosed to the Financial Times that the company faced direct costs of €100 million due to fines and expenses related to improving its AML controls. However, the indirect costs, including reduced valuation and missed growth opportunities, were far higher. “The impact on N26 surely amounts to billions of euros because it lowered the company’s valuation as we were unable to grow,” Stalf said.

BaFin fined N26 €9.2 million last week for late filing of suspicious activity reports in 2022, following an earlier fine of €4.25 million in 2021 for similar issues. An independent monitor will continue to oversee N26’s AML controls.

Despite the regulatory challenges, N26 has shown resilience. In 2021, before the regulatory action, the company was valued at €7.7 billion. Stalf emphasised that while growth remains a priority, the focus has shifted towards profitability and creating a sustainable client portfolio. “Our key priority won’t be growth but profitability of clients and attractiveness of market,” he said.

N26 has made significant strides towards profitability, halving its losses to €100 million last year and increasing revenues by 27% to over €300 million. The company aims to boost revenues by up to 35% this year and is on track to become profitable in the second half of 2024.

Founded in 2013, N26 has 8 million customers across 24 European countries. However, it has scaled back some of its international ambitions, exiting markets in the UK, US, and Brazil. Initially offering current accounts, N26 has expanded into brokerage services and savings accounts.

Stalf expressed confidence in the company’s future growth and potential IPO, noting that the regulatory challenges have strengthened N26’s operations. “We did learn a lot over the past two and a half years from the close cooperation with the regulator,” he said, adding that this experience will be valuable as the company moves towards an IPO.