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N26 is second banking 'unicorn' to face regulator's questions

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
N26 CEO Valentin Stalf speaks on stage during TechCrunch Disrupt Berlin 2018 in Berlin, Germany. Photo: Noam Galai/Getty Images for TechCrunch

App-only bank N26 has become the second billion-dollar European banking startup to face questions over compliance.

German business daily Handelsblatt reported on Monday that BaFin, Germany’s financial regulator, identified “numerous” shortcomings at Berlin-headquartered N26 related to staffing levels, outsourcing, and engineering.

The news follows separate inquiries by UK regulators into Revolut, a rival banking app headquartered in London.

App-only banks have attracted huge amounts of capital in recent years, with both N26 and Revolut reaching so-called “unicorn” status — a valuation at over $1bn. Much of the investment hype has focused on the break-neck growth of these startups. Launched in 2013, N26 has rapidly expanded across Europe and now has over 2.5 million customers.

BaFin’s criticism centred around the fact that processes and staffing levels at N26 had not kept up with its growth, according to Handelsblatt.

READ MORE: $1.7bn startup Revolut’s bank plans could face tough culture questions

Handelsblatt said BaFin ordered changes at the bank after a special audit. A spokesperson for N26 declined to comment on any specifics to Yahoo Finance UK.

N26, as with all licensed banks, is subject to regular internal and external independent audits, including those by regulatory bodies such as BaFin, the German Financial Authority,” the spokesperson said.

“Any findings are promptly reviewed, implemented, and monitored in coordination with the BaFin. We strive to meet all requirements consistently and take any required measures as quickly as possible.”

The spokesperson said that UK customers would be unaffected by any changes.

Revolut CEO Nikolay Storonsky speaks onstage during Day 2 of TechCrunch Disrupt SF 2018 in San Francisco, California. Photo: Kimberly White/Getty Images for TechCrunch

News of BaFin’s scrutiny follows similar recent reports about Revolut, a UK rival to N26. The UK’s Financial Conduct Authority (FCA) investigated Revolut after a whistleblower raised concerns about the company’s culture and compliance, the BBC reported earlier this month.

Separately, the Telegraph reported on apparent issues with sanctions screening controls at Revolut. The FCA said it was seeking more information from the startup after the Telegraph’s piece.

Revolut told the BBC its “compliance procedures are and always have been overseen by an executive risk committee in consultation with our senior compliance staff members.” It also pushed back against the Telegraph report in a blog post that said no laws were broken.

Both the N26 and Revolut cases highlight the potential pitfalls of applying the growth mindset of tech investors to regulated financial services. Gillian Roche-Saunders, the head of compliance at Bates Wells Braithwaite, told Yahoo Finance UK last month that a bank’s focus “shouldn’t be growth solely.”

READ MORE: Revolut calls in ex-Daily Mail editor and hunts defamation lawyer as negative headlines continue

Handelsblatt is not alone in raising concerns about N26. Customer complaints have piled up at the bank, with people saying they were locked out of their accounts after being targeted by phishing attacks, Germany’s Der Spiegel reported in March.

German website Gründerszene also recently reported that N26’s customer service team did not react for several weeks to a Berlin customer having €80,000 stolen from their account.

To ensure we have the right talent to handle our responsibilities as a bank, we’ve increased our company size to more than 1,000 employees,” the spokesperson for N26 told Yahoo Finance UK.

“The number of employees in customer service alone has tripled in the last year, and we will continue to grow across all departments to ensure regulatory compliance and serve our customers in the best way.

Thanks to the expansion of our customer service over the last six months, we are currently offering customers our help in less than 30 seconds, on average. Today alone, we have a customer support team of over 400 people and can therefore ensure high accessibility.”

N26 is one of Europe’s hottest startups. The app-only bank, which is headquartered in Berlin, has raised over $500m from investors including Hong Kong billionaire Li Ka-Shing and PayPal cofounder Peter Thiel.

Additional reporting by Jill Petzinger in Berlin.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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