Bafin’s ’Aggressive’ Stance Won’t Kill Off N26

November 11, 2021
N26 has had a less than perfect year dealing with Germany’s financial watchdog, yet payments experts believe that regulatory action will not have a long term effect on the Berlin-headquartered neobank.

N26 has had a less than perfect year dealing with Germany’s financial watchdog, yet payments experts believe that regulatory action will not have a long term effect on the Berlin-headquartered neobank.

In a decision that Bafin says has been final and binding since November 6, N26 will need to take measures to ensure the institution has “once again” got a proper business organisation in place and to mitigate risks to the institution’s operational resilience.

Bafin’s intervention is a result of the bank’s substantial growth in recent years, which has highlighted shortcomings in risk management. As part of the measures ordered by the regulator, a special commissioner appointed by BaFin will monitor the implementation. This special commissioner also, according to a source close to the parties involved, is independent of Bafin.

The regulator has ordered risk mitigation measures that place limits on customer growth and on certain risk exposures. This includes the requirements that N26, substantially reduce the level of customer acquisition permitted each month to a maximum of 50,000 new customers.

It also imposes a limit on the bank’s exposure on secured property mortgages to no more than €500m, a limitation that is applicable in all countries in which the N26 bank operates.

This type of sanction marks a sea change for Germany’s banking watchdog, according to experts in this field.

“In the past, violations were penalised with fines. In some cases, special representatives were appointed, but limiting new customers' businesses is new,” said Jacob Wende, chief executive at Berlin-based OneReg.

It is obvious that Bafin wants to punish startups and fintechs where it hurts, he continued, “in their growth”.

"This type of action is not rare in Europe, but it certainly is in Germany,” said Arcady Lapiro, chief executive at digital banking consultancy Agora. “The BaFin tool is a very aggressive stance to take.”

“In the short term, this is bad news for N26, as they will have to keep to low activity and won't be able to keep up with competitors such as Revolut,” suggested Lapiro.

However, in spite of the regulatory intervention, the year has been a success for N26, which culminated in a $900m funding round last month.

This took its market cap to $9bn, higher than the market cap of Commerzbank, Germany’s second-biggest listed bank, and even led the chief executive to suggest that N26 could go public next year.

Shielded by its success

Commercial success is part of the reason why N26 may not suffer too excessively from Bafin’s restrictions.

So far, the bank offers services in 22 markets across Europe. It had also operated in the UK but exited the market in April 2020 after Brexit delivered an end to passporting rights.

“I'm leaning towards the interpretation that N26 will be able to fix the cracks in their AML systems and practices,” said Zsanett Andresin, a London-based innovation consultant.

For Andresin, this is due to the size of their latest funding round, as well as the fact that their existing investors stuck with them. “They were also able to attract new ones who must have done their own due diligence,” she noted.

“It's sufficient to look at the reviews of the neobank apps to see that most of them have issues around the robustness of their anti-money launder[ing] screenings”, she continued. “There is a point in the growth of these neobanks when the cracks reach the stimulus threshold of the regulators."

In fact, the cracks had begun to show earlier this year.

In September, N26 made public that it had been fined €4.25m for AML failures. The fine was imposed because of the delayed submission of suspicious activity reports in 2019 and 2020.

Depending on the progress made in remedying the shortcomings, the measures to mitigate risks may be adjusted gradually following an assessment by BaFin and in consultation with the special commissioner.

“The sanction demonstrates the importance of preventing money laundering in Germany. Precautions need to be taken not only by major banks but also by fintechs and start-ups,” said Wende.

Money laundering prevention is not an area where one should make budget cuts, he cautioned. “Companies from the entire fintech sector should review their preparation and whether they have any gaps in this area.”

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