European digital banks are poised to invade the US after enrolling millions in Europe for their services, but they face a market more fragmented, much slower to adopt digital banking and characterized by consumer loyalty to existing institutions.
Germany’s N26, which has 3.5 million customers in 24 European countries, and Britain’s Monzo, which has 2.2 million customers, are both launching services in the US this summerOpens a new window , initially to American clients they have wait-listed.
N26’s waiting list has 100,000 people who will roll be first to access its mobile servicesOpens a new window . The European firm has partnered with Axos Bank in California to leapfrog the arduous process of getting a bank charter and offer FDIC deposit insurance.
The bank makes it as easy as possible. It takes five minutes to sign up on your mobile phone, there are no account maintenance fees, no minimum balances, and N26 will reimburse third-party ATM fees. Accounts are traditional checking accounts with ACH electronic payment functions, routing and account numbers.
Rapid growth in Europe
In Europe, N26 is adding 10,000 accounts a day, buoyed by high customer ratings and word of mouth. If the initial target of 100,000 sounds low, that was the total the service enrolled when it launched in Germany and Austria in 2016. It has grown geometrically since thenOpens a new window , adding another million in four months to the 2.5 million it counted in February.
Monzo, meanwhile, is using its face-to-face approach, and plans several major events in US cities as it opens its own waiting list. It will launch a US service with a Mastercard debit card and a mobile app that sends instant spending notifications, conducts peer-to-peer payments, splits money into different pots, and enables spending abroad without fees. Like N26, it is partnering with a US bank, Sutton Bank of Ohio, rather than obtaining its own license.
The firm’s first events are scheduledOpens a new window for Los Angeles, where Monzo will offer several thousand cards to prospective customers and which will serve as the digital bank’s base as it expands to other cities.
Neither N26 nor Monzo is offering lending or a full range of bank services. N26 has deliberately opted to build up its global customer base before expanding its product range. Monzo says it aims to develop its US services through dialogue with customers to find out what they really want.
Fragmented and saturated market
It’s far from certain these fast-growing fintech firms can duplicate their success in Europe. At home, they confronted highly consolidated domestic markets dominated by a few big institutions that remained crippled after the financial crisis, in many cases moving far more slowly than their US counterparts to clean up their balance sheets. Meanwhile, regulators in Europe have been more flexibleOpens a new window in approving the startups than those across the Atlantic.
The US historically has been an extremely fragmented market with severe limitations on interstate and even branch banking for much of its history, so customers tend to remain loyal to the thousands of credit unions and local community banks as well as the large regional and national banks that have resulted from consolidation over the past few decades.
While US banks have not been pioneers in developing mobile banking, they have ample resources to respond if their market share comes under threat.
Nevertheless, N26 has raised $500 million from backers such as Peter Thiel’s Valar Ventures and China’s Tencent for its US expansion. It also raised a further $300 million earlier this year in a funding round that valued the privately-held company at $2.7 billion, leaving it well equipped to compete with domestic challenger banks such as Chime, Zero, Varo Money and Simple.
Federal licensing option
Although there are also mobile app competitors including PayPal’s Venmo and Square’s Cash App to contend with, the Berlin-based start-up believes it has an opportunity in the US, with its mobile-savvy population and relatively high bank fees. The European fintech firms argue that US banks have not been challenged to develop apps as easy and flexible as theirs.
Like most start-ups, N26 and Monzo are running at a loss, though Monzo has narrowed its loss per customer and N26 claims it makes a profit on each customer, although it still reports a loss due to investment in growth.
The European firms have the option of obtaining banking licenses of their own if they wish to expand their product range. The Office of the Comptroller of the Currency last year said it would accept applications from non-deposit taking digital banksOpens a new window for a national bank charter, removing the need to go through the licensing process state by state.
But that will probably depend on how well things go. The aggressive start-ups, confident from their success at home, could prove to be the catalyst for an overdue shake-out of the US banking industry.