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June 17, 2021

Strategy & Business Model – N26 Brazil

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German-based N26 came out of the gates strong in the early challenger banking days with its lifestyle-oriented brand. Since their red-hot days in late 2019, they have sputtered strategically, but are now trying to reverse course with a new business model and a foray into the jungles of Brazilian financial services, where they hope to reignite their growth story.

N26 Brazil

Early on in the days of challenger banking, the European names were among the hottest, including Revolut, N26, and Monzo. Their subscription models appealed to a new generation of consumers looking for fee-less options for everything from their daily banking needs, to travelling around the continent and withdrawing cash, to managing their freelancing cashflow and payments.

Canvas – N26
Challenger Banks – 2019

N26 was among the first of the Euro challengers, having been founded in Germany in 2013. Unlike UK-based Revolut, Monzo, and others, N26 always had a unique brand and was the first to secure a European banking license in 2016.

Fast forward to 2019, and we can see that N26 was growing rapidly across the continent, while their valuation was also growing at a rapid clip. The company’s Series D in Q3 2019 valued the company at $3.5 Billion.

To say that it would be considered a disappointment to be here in Q2 2021 with the company being in the same valuation bracket as 24 months earlier would be an understatement. Their last fundraise was in May of 2020 at $3.6 Billion, and while there are rumours of future rounds at a higher valuation, nothing has been officialized yet at a time when we see the top challenger banks and fintechs raising money at exponentially higher valuations than pre-pandemic.

>NubankBrazilian-based, credit-centric challenger bank, LatAm expansion – $30 Billion valuation (June 2021) vs. $10 Billion valuation pre-pandemic (July 2019)

>Chime – US-based debit/ACH focused challenger with payment processing business model $30 Billion valuation (rumoured in Mar. 2021) vs. $5.8 Billion pre-pandemic (Dec. 2019)

>SoFi – US-based, members-only (high credit score) challenger bank with lending-centric model (NIM business model) – $20 Billion valuation ($SOFI publicly traded) vs. $4.3 Billion pre-pandemic (Mar. 2019)

The company exited the UK in early 2020. Despite reaching headline growth numbers of 500,000 accounts in the U.S. one year after entering the market in mid 2020, the company didn’t even register in the Top 10 among challengers in the U.S. Their strategy outside of Europe, on the balance, has failed to date.

“Of the bank’s major mistakes, the biggest has been to pursue an undifferentiated strategy toward multiple different markets. Its mile-wide, inch-deep approach has failed to take as many customers as Revolut’s more tailored proposition, while competition in more crowded markets, such as the U.K., has forced out N26 altogether,” 

Banking Dive

N26 has continued to perform well in its core EU markets – Germany, France, Spain, and Italy – but these remain markets that are relatively saturated with both challenger banks and digital banking. Compare that to a country like Brazil where the ‘Big 5’ banks charge exorbitant fees to the country’s 200 million+ citizens, and interest rates on credit cards can range from 150% to north of 500%.

The Generalist
The Generalist

By contrast, almost all Brazilian banks charged annual fees for even basic credit cards—$20 the lowest. And that was just the start; the banks also charged monthly fees for everything from fraud protection to text-message alerts. In 2019, fees made up nearly 40% of Brazilian banks’ revenue, compared with 15% to 20% for banks in Mexico, Argentina, Peru and Chile, according to a JP­Morgan analysis.

Forbes

The company first announced their intention to enter the Brazilian market in early 2019. It wasn’t until early 2021 that they received the green light from the Brazilian Central Bank to begin operations in the country. In the land being set ablaze by digital-only challenger Nubank (with 35 million+ Brazilian users), N26 will need to evolve its strategy and business model to compete.

@N26 Twitter
Canvas – Nubank

Brazil is a country where ~30% have a credit card and the majority of the populations 200 million+ are underbanked and overcharged; therefore, there is lots of room for innovation and grabbing market share in the years ahead. But the strategy and business model will need to shift in the interim.

Doubling Down in the U.S & The Marketplace Model

Roughly 90% of N26’s 7 million+ users (Q1 ’21) are in Europe, where they remain one of the region’s strongest challenger banks amid strong competition. In the EU, they offer their clients a subscription service which drives a lot of the company’s revenue growth. The Business Accounts in the EU follow an identical model.

N26 Personal Accounts – EU

Whereas in the U.S., where the subscription model is uncommon among challengers, the company relies on interchange fees alone with its U.S. Personal accounts. While some market leaders like Chime have risen to prominence on the debit-based interchange model, N26 has not been able to find success on this model alone.

Those “unit economics” are driven by interchange revenue from debit card transactions. Chime customers average 50 card transactions a month, according to Britt.

The Financial Brand

Part of N26’s strategy shift in the U.S. in 2021 is to begin on-boarding the subscription model stateside. This pairs well with the company’s desire to begin to differentiate itself as more of a lifestyle brand and offer discounts to popular services in its segment (ie. coworking, travel, etc.), while offering cashback on popular consumer names (ie. Hello Fresh).

N26 offers a free account for U.S. users, including personal finance management tools, access to a fee-free ATM network, early paycheck deposits and cash-back rewards. The company plans to enhance these offerings and said it is considering adding lifestyle-oriented subscription bundles for U.S. customers, similar to what it offers its European customers.

Banking Dive

The company is growing its employee headcount by 75% in the U.S. in order to continue to try and expand market share at a time when competition between challenger banks and incumbent megabanks is reaching a feverish pitch.

US Primary Bank Customers via Forbes

Meanwhile, the company will begin experimenting with the ‘marketplace model.’ N26 will effectively earn a referral/third-party fee on each conversion of financial-services products that could span from credit through trading, factors that will likely depend on market-specific regulations and margins for each product category.

On the product front, N26 said it plans to roll out a “marketplace model” this year, beginning in Europe, that will allow N26 to offer partner products, including potentially trading, credit and other enhancements to the digital banking experience.

Banking Dive

This will help push the company towards profitability and a potential 2023 IPO at what they hope will be a much higher valuation than today given where some of their competitors are at.

Brazil Business Model

Brazil can best be summed up as ‘opportunity’ for N26, especially compared to the saturated and über-competitive markets they are already operating in.

“The environment in Brazil is actually very favorable,” Tayenthal said. “Everyone has a bank account in the markets we’re in already; in Brazil, this is obviously not true.”

CNBC

The Brazilian market has very unique characteristics compared to almost every other market not just in LatAm (Latin America), but also the world.

The country’s monetary policy committee recently decided to cap interest rates at 150% with average rates above 306%, illustrating the problem remains unsolved. A map of interest rate spreads — the difference a bank receives from loans and the rate it pays on deposits — demonstrates how far of an outlier Brazil is, with a spread of 32.04% compared to 3.35% in Russia and 2.85% in China. 

The Generalist

Not only are the interest rates obscene, but the country’s banks make ~40% of their revenue on fees. Roughly 55 million – or about 25% – of the country’s population remains unbanked. Roughly 30% of the country has credit cards, but as we have seen, even with Nubank the interest rates remain ridiculous.

For all its success, Nubank’s strategy in Brazil seems uncopyable for N26. The 35 million+ users and roughly 5% credit card market share – not to mention the fresh $500 Million in capital injected by Berkshire Hathaway – means that Nubank can continue to expand its hometown advantage through platform-level innovation and new product offerings alone. The company enjoys an 86 NPS (Net Promoter Score), compared to the Big 5 incumbents with average NPS of ~50, meaning the majority of those 35 million customers are satisfied to boot.

Nubank was able to be in the right place at the right time with the right strategy.

Forbes

Canvas – Nubank

But in addition to Brazil being a very tech-savvy and advanced LatAm nation in terms of payments innovations, Brazilians are also typically very welcoming towards highly-regarded foreign brands from the U.S. and Europe. Brazil may be an optimal market for N26 to try honing both its brand messaging and new business model in order to bring back the rapid growth the company saw in its earlier years.

Banking on the Brand

N26 is company that has faced its share of controversies with the German BaFin regulators, with its most recent reprimanding coming in May 2021 in relation to internal security as it pertains to money laundering. A similar incident happened in 2019. Nevertheless, with Germany having one of the strictest and most stringent financial regulators in the world – one hoping to avoid ever seeing another Wirecard fiasco – we can expect that N26 will adapt the internal procedures it establishes to its global market.

A special representative will be appointed to monitor the processing of the order and the status of the elimination of other identified deficiencies. More specifically, BaFin ordered N26 Bank GmbH to rectify deficiencies both in IT monitoring and in customer due diligence.”

Alt Fi

If N26 can tighten the screws on compliance and offer Brazilian customers a compelling product, then its big differentiator will be its brand. Whether its because of their European roots or simply because they are full of top-tier creatives, N26’s messaging and branding style has always stuck out among challengers.

Pinterest

With the ‘marketplace model’ being centred around new banking and lifestyle-based partnerships across multiple consumer sectors, N26 can promote its ‘lifestyle brand’ in a way that resonates with young Brazilians and ideally pair it with better banking products, lower interest rates, and create competition among challengers with Nubank. The net result would be a much better set of financial services opportunities for young Brazilians, especially with some of the economic devastation they have seen related to the pandemic.

N26 Spaces

Creative concepts like Spaces can encourage young people – the demographic the company is targeting – to save money towards future endeavours. The company could also target consumers by offering higher-than-market Savings rates – a tactic that is common among challengers in new markets – and work within its marketplace with one or two partners to earn significant NIM spreads.

Since Nubank charges no fees to its customers to open or use their ‘Digital Account’ there is no way to undercut them with their traditional ‘no fee, transparency‘ strategy that worked in the early days of their European rollout. Therefore, they will have to be creative with their brand, their marketing, and the way they adapt certain layers of their product to the specifics of the Brazilian market.

Overall, N26 has made some big changes on both a strategy and business model level in the last 12 – 15 months. Now, the opportunity in Brazil – where they were recently licensed to operate – gives them a fresh track to reboot growth and jump back into the heart of the global challenger banking conversation.

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