Protocol | Fintech

N26 is preparing for US fintech regulations by drawing lessons from Europe

"There's a lot more scrutiny being placed on fintech. We are definitely mindful of it."

Stephanie Balint, N26 U.S. general manager

In an interview with Protocol, Stephanie Balint, N26's U.S. general manager, discussed the company's approach to regulations in the U.S.

Photo: N26

N26's monster $900 million funding round announced Monday underlined the German startup's momentum in the digital banking market.

Stephanie Balint, N26's U.S. general manager, said the funding will be used for expansion and also to improve "our core offering to make this the most reliable bank that our customers can trust," she told Protocol.

That second goal is partly based on how the Berlin-based company, like other fintechs, has recently grappled with what has become a typical challenge: regulations.

N26 also disclosed that it has agreed to essentially slow down its growth by temporarily onboarding only 50,000 to 70,000 customers per month. This was part of an agreement with BaFin, the German regulatory agency, which recently fined N26 about $5 million for delayed reports of suspicious activity related to anti-money laundering.

Regulations are also a key concern in the U.S., where N26 launched in 2019. The company, whose banking services are provided by Axos Bank, has half a million of its 7 million users in the U.S. and competes with bigger, more established neobanks like Chime and Current.

In an interview with Protocol, Balint discussed N26's approach to regulations in the U.S., where she said "the regulatory environment is different" and requires "a slightly different approach."

This interview has been edited for clarity and brevity.

How do you plan to expand with this funding?

We plan to grow our team overall by about 1,000 employees globally, especially focused on product technology and security. There's a lot of elements that we want to build on to improve our core offering to make this the most reliable bank that our customers can trust for the years to come.

Can you explain the announcement that N26 has agreed to temporarily onboard only 50,000 to 70,000 onboarded customers per month?

That's specific to our European operations. It is tied to some of the previous disclosure we've had on the work we've been doing over the past year or so to improve a lot of our core operations, especially in compliance. That is basically a key area that we're continuing to invest in in the near term. Some of the funding and the hiring that I was talking about before is actually going to be going towards that as well.

Can you talk a bit about the weaknesses or gaps that got flagged by the German regulators?

There were a few findings that were discussed I think back in May based on a few findings from BaFin [on] the way that we were doing some transaction monitoring. Specifically, I believe that it was around document verification.

What are the key lessons from that experience that are top of mind for you as head of N26 in the U.S., where there has been heightened focus on regulations and where the regulatory environment is different?

That's a great question and a great point. I think one element of our U.S. operation has always been that because the regulatory environment is different, we have had a slightly different approach. We work with a sponsor bank here in the U.S. [Axos Bank] who provides that needed oversight and auditing. They are monitoring our own compliance practices here in the U.S. We have been able to see that it is very important to invest in some of these compliance topics early on so we have the benefit of, while we're maybe a bit smaller than our European counterparts, being able to implement things maybe a bit sooner than they were able to do in Europe, which has definitely been beneficial for our business.

Can you give me an example?

For example, transaction monitoring. We're using a pretty preeminent system here in the U.S. for that. It is one that we work closely with our sponsor bank on, and it's pretty much the gold standard of transaction monitoring for AML [anti-money laundering]. We've invested a lot in making sure that it's functioning properly, that we can automate it where possible. That's paid a lot of dividends for us in terms of making sure that we don't run afoul of any transaction monitoring issues and the like.

How would you describe the competitive landscape in the U.S. where you're up against bigger players and more established players?

We can see that there's plenty of opportunity in the U.S. market. There's a lot of different neobanks that have either entered the space recently or are a bit more established and have taken significant share. We also see that a lot of the traditional banks are investing heavily in their mobile banking solutions because they can see that the appetite is really clearly there among the consumer base.

There is a lot of space for many players and so there isn't a clear winner yet. And so we're pretty optimistic that there is room for N26 here in the U.S.

What has been the biggest hurdle for you?

Hmmm. I don't have a good answer for that. Maybe come back to you. [Laughs.]

How are you looking at the way the Biden administration is approaching regulation in financial services?

There's definitely a lot more scrutiny being placed by national regulators on fintech [companies] such as ourselves. We definitely are staying on top of that trend, being mindful of it. We work very closely with Axos, our partner bank, to ensure that we are staying abreast of the changes in the regulation and making sure that we're positioned correctly so we aren't running afoul of any of those issues. We have a very close working relationship with them on those topics and consult each other on things and how to best market ourselves, how to best communicate with customers so that we aren't tripping on any of those issues. Certainly we can see that the scrutiny has heightened in the past few months.

What regulatory proposal that has already been out there is most troubling for you?

I wouldn't say it's the most troubling. But one that we've been keeping an eye on is the "Truth in Lending Act," because that obviously has implications as we maybe start to think further afield from our current product, which is just currently a debit product. As you start to think about things like credit overdraft, how do you make sure that as a fintech that doesn't necessarily immediately want to have a bank license that you are demonstrating who the true lenders are in these situations and aren't running into any hurdles from the regulators on that.

That's a good segue to my next question. Some of the fintech companies are moving toward getting a charter or buying a chartered bank. Would you consider that in the U.S.?

I wouldn't rule anything out. We entered the market purposely through a sponsor bank partnership because we viewed it as a bit more flexible in the short term, [have] faster speed to market and would allow us to get to proof of concept and a bit of product market fit. I think the U.S. environment is a little bit more onerous than the European one is in terms of licensing and chartering. It's a lengthier process. It's quite an investment of time, money, resources, and can also be distracting to your growth ambitions right in the short term. There's a tradeoff. The sponsor bank model is working well for us right now. Would I rule out that in the future we might pursue a license? No, but we would evaluate it amongst a number of different options when the time was right.

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