Both N26 GmbH and Fidor Bank AG cited Brexit as the reasons for their decisions to leave the British market, an explanation that some industry insiders suggest is a smokescreen for other problems — specifically, the difficulty of competing for customers in an increasingly crowded U.K. digital banking market.
The German challenger bank announced Feb. 11 that it would end its U.K. operations, which echoed German-based, French-owned challenger Fidor's departure from the U.K. market in 2019 due to "market uncertainties" related to Brexit.
While Brexit may prompt some European financial technology companies to evaluate their British operations, industry insiders think that fierce competition is more likely to be the reason for further exits.
'Unable to operate'
N26 said it would not, in due course, be able to operate in the U.K. under its current license and will close all accounts April 15. The bank has about 200,000 customers in the U.K.
The U.K. formally left the EU on Jan. 31, but EEA financial institutions operating in the country will still be able to use their passporting rights — which allow them to carry out business in the U.K. — during the transition period that runs until Dec. 31. After that, they will have to apply for a U.K. banking license.
N26 launched in the U.K. in late 2018, more than two years after the 2016 referendum in which Britain voted for Brexit. The bank's intention had always been to remain in the U.K. post-Brexit, a spokesperson said. But having reviewed their position, N26 decided against applying for a U.K. banking license.
"As a European bank with a European banking license, we would need to undertake complex regulatory measures and product updates in order to continue operating in the U.K. A separate license for the U.K. would require significant operational processes and costs. We continue to be able to operate throughout the European Union on our German license," a spokesperson said.
Other European fintechs may decide to make a similar decision due to the licensing issue, according to Sarah Kocianski, head of research at 11:FS, a London-based consultancy firm specializing in fintech.
The only option for fintech firms licensed in Europe operating in the U.K. on a passporting basis is to get a U.K. license, Kocianski said. "That takes time and money, so it's quite possible firms will either retreat or not offer their services in the U.K."
William Wright, managing director of London think tank New Financial, said that while he could not comment on N26 specifically, it is true that Brexit will significantly increase the regulatory burden on European financial services companies operating in the U.K.
"For some firms Brexit may be the occasion to review whether it is worth continuing to operate in the U.K. rather than the cause," he said.
Crowded market
An increasingly crowded market and the difficulty of trying to compete with flourishing digital banks such as Starling Bank Ltd. and Monzo Bank Ltd. may have been the reason behind N26's change of strategy, according to Kocianski.
"Whether this particular move is actually about Brexit and them feeling they cannot build a sustainable business here, or whether it's because of the highly competitive market, and they feel they can make a bigger impact faster elsewhere, we'll likely never know. I suspect it's the latter."
N26 lags better-established competitors in customer acquisition numbers in the U.K. Monzo, launched in 2015, has more than 3 million customers while Starling, launched in 2014, has around 800,000.
Andrea Dunlop, chair of the Emerging Payments Association, an industry body, said that the departure of N26 tells us more about the highly competitive market for digital challenger banks in the U.K. than it does about the negative impact of Brexit on the market.
Had N26 really wanted to stay in the U.K. market, they would have been able to find a way to secure a license, she said.
"It's a very competitive market out there, and I wonder which challenger banks will make it through. I think we will start to see consolidation," she said, adding that this is something that homegrown challenger banks need to watch out for just as much as European ones.
U.K. banking majors Royal Bank of Scotland Group PLC and HSBC Holdings PLC launched their own digital-only arms in late 2019 in a bid to compete with fintech upstarts — Bó and Mettle in the case of RBS, and Kinetic for HSBC.
Following on from the news of N26's departure, Dutch fintech bunq BV said it was committed to remaining in the U.K.
"Based on the current rules and regulations, we see no (regulatory) reason to leave the U.K. In fact, we love you guys!" CEO Ali Niknam said in a blog post.