Branchless banking has become one of the biggest shake-ups of the banking industry in the modern age. Put simply, it allows people to have access to financial services, without having to utilise a physical branch. It is particularly revolutionary for those who live in remote areas, or those who have traditionally been excluded from access to banking.
These so-called “challenger banks” are shaking up the banking sector and taking on some of the titans of the financial services industry. With the news last week that Fintech firm, N26, one of the largest branchless banking services, will be withdrawing its business from the UK, the spotlight has turned to this relatively new sector.
What is a Challenger Bank?
A challenger bank is a relatively new term which is used to describe a small retail bank or Fintech (financial technology firm) which has been set up to compete with the larger, more established banking firms. They usually do this through utilising technology, such as apps, to provide branchless banking and remove the paperwork and other complexities from day-to-day banking.
Challenger banks usually don’t have physical branches, keeping their overheads lower and, hopefully, passing on these savings to their customers. Many people are drawn to challenger banks and their relatively untarnished records, especially after events such as the PPI scandal which led some to distrust the big banks.
Who are N26?
N26 are a German-based digital bank that was founded in 2013 and has enjoyed some success in Europe and the USA. They believe that “banking should be simple, transparent and easy to use.” They entered the UK market at the end of 2018, in the hopes that they would be able to continue the growth it had already seen in mainland Europe. It was offering current accounts and credit cards to UK customers and was tapping into the desire many people had for a simpler banking process that could be managed from their phones.
Why have N26 pulled out of the UK?
Valued at $3.5billion last year and looking to expand its reach, it came as a surprise when, last week, the company announced it would be withdrawing and shutting down operations in the UK, due to Brexit. According to a statement released by N26 on the 11th February, the company stated that “With the UK now having left the European Union, we will in due course be unable to operate in the UK with our European banking license.”
N26 were originally operating in the UK, utilising a European financial passport and had, back in 2018, assured customers and press alike that they were “working with British regulators to attain the necessary authorisation in a post-Brexit UK and do not expect customers to be affected by any transition.” Fast forward eighteen months and the bank now plans to close all of its UK accounts on the 15th April 2020, due to not being able to operate in the UK with its European banking licence. This will affect around 200,000 customers, who have been asked to move their money to other accounts.
In this article from The Financial Times, a blog on N26’s website, entitled “How N26 is preparing for Brexit,” stated that “Whatever the outcome, your account is protected: we are 100% focused on ensuring minimum disruption to our customers.” According to The Financial Times, this blog had been removed on Tuesday 11th February.
What does this mean for N26?
The Chief Banking officer, Thomas Grosse, said in the press release that “Although we will be leaving the UK, we will continue our mission to radically transform the global banking industry through innovation and the power of technology. This means growing within the European Union, where we recently crossed the 5 million customer mark, building our presence in the US, one of the most attractive global banking markets, and expanding into new countries.”
According to a blog released on the 11th February, N26 stated that they are still committed to their original vision to “transform the global banking industry for the better.” They say that they have five million customers worldwide and that their recent entrance into the US market has been successful, with more than 250,000 customers joining them in the preceding months. The withdrawal from the UK market doesn’t seem to have dampened their original goal and they are investing more into their mobile experience and product offerings. However, this is of little comfort to the UK-based customers who, according to this article on CNBC, have been left feeling “‘outraged” and ‘betrayed’ by the firm’s decision to leave the U.K.”
A Competitive Market
However, despite N26’s assertion that Brexit is to blame for their withdrawal from the UK, it has been suggested, for example in this article in the Financial times, that the bank had struggled to gain a foothold in the UK market and that it hadn’t realised the scope or complexity of operating in such a competitive arena. The bank entered the UK market in late 2018, over two years after the Brexit referendum and with, ostensibly, only six months until the original departure date. This has lead some to question the veracity of N26’s claims that Brexit is entirely to blame.
With Revolut, Monzo and Starling already successfully operating as challenger banks in the UK and with the complexities involved in securing a licence, it has been suggested that it may have been a simpler option for the bank to withdraw from the UK.
Indeed, Monzo has already released a blog about N26’s withdrawal, in which they encourage previous customers of the German bank to transfer their funds to a Monzo account before the 15th April. The blog outlines what will happen to N26 bank accounts in the UK and then provides information on setting up a Monzo account, as well as stating clearly that they “have a banking licence in the UK, which means we can keep operating here as normal after Brexit.