N26’s US Failure: A Lesson For All Challenger Banks, Not Just Those From Europe

OBSERVATIONS FROM THE FINTECH SNARK TANK

Germany-based challenger bank N26 announced it will close its US operations. According to CNBC:

“N26′s 500,000 American customers will no longer be able to use its app from Jan. 11, 2022. The Berlin-based fintech, which was valued at $9 billion in a recent funding round, said it wanted to shift focus to its core European business.”

An N26 spokesperson told The Financial Brand:

“We would need to invest significantly more and prioritize the market over our other global priorities if we are to truly make the US a success in the long run.”

N26’s US Plans

When N26 launched in the US in July 2019, I had an opportunity to interview Nicolas Kopp, CEO of N26’s US operations.

Me: What's the shortcoming in the US banking market that N26 is seeking to correct?

Kopp: Americans are disgruntled on a number of fronts. First off, the mobile banking experience here is poor. Second, many consumers experience hidden account and overdraft fees. N26 will have no monthly fees, no minimum balance, no ATM fees, and no overdraft fees—because there will be no ability to overdraft.

Me: What segment(s) of the US market are you going after?

Kopp: N26 is for people who live life on a mobile phone. There’s no focus on age, income, or background. In fact, the average age of our European customers is over 35.

Me: What are the key differentiators of N26's offering?

Kopp: Early paycheck access—customers can get access to their paychecks two days faster. We’re also offering the best exchange rates on card transactions for the travel nomad.

Me: How does N26 plan to gain market awareness?

Kopp: We plan to focus our customer acquisition efforts through organic (vs. paid) channels.

N26 Was Doomed To Fail From the Start

Some industry observers have chalked up N26’s US failure to reasons like “global banking is hard,” and “the US is a hostile regulatory environment.”

These might be contributing factors, but the seeds of N26’s US failure were sown right from the very start of its launch in July 2019:

1) Incorrect market assumptions. Whoever’s telling Europeans that Americans hate their banks and that we think the mobile banking experience sucks needs to stop.

S&P Global analyzed the functionality of banks’ mobile banking offerings, identifying 18 value-added features (i.e, beyond basic transactional capabilities).

The megabanks—Bank of America, JPMorgan Chase, Citibank, and Wells Fargo—offered, on average, 16 of the 18 value-added mobile banking features on their apps. The result: According to 2021 American Consumer Satisfaction Index (ACSI), national banks performed best on mobile app quality with a score of 84.

As for the “hidden fees” argument, can we get past this charade? Every bank in the US posts a schedule of its fees on its website. The fact that no one seeks it out and reads it doesn’t make the fees “hidden.”

2) No product/segment differentiation. While many banks and credit banks have jumped on the early paycheck bandwagon in 2021, even in 2019, Chime and Varo were offering this feature, making it an undifferentiated feature for N26. No fees is an attractive pricing approach, but again, other challenger banks beat N26 to that punch.

N26’s target market also left something to be desired. Anyone who “lives life on a mobile phone” is hardly a definable market segment as, seemingly, every American between the ages of 13 and 40 spends their entire life on their mobile phone.

In contrast, Chime and Varo were clear that they were designing products for low- to middle-income consumers—whether they lived their lives on a mobile phone or not.

3) Insufficient marketing. Speaking of marketing, when I last saw numbers for it, Chime was spending roughly $100 million a year in TV and print advertising. With a similar set of products to Chime and Varo, N26 was deceiving itself thinking it could succeed with just word-of-mouth and referral marketing.

The Lessons for All Challenger Banks

N26’s US failure should provide a few lessons for all challenger banks—not just those from Europe:

• Product differentiation is a must. Differentiating on customer experience is a higher hurdle to overcome than dealing with the regulatory environment. Thinking you can deliver—and sustain—a superior customer experience is recipe for disaster. Especially if you don’t have unlimited funds, whether that’s because you’re competing with other business units for funding or because you have to continually raise venture capital.
• Affinity is the new community. The flip side of product differentiation is knowing who you’re designing products for. The challenger banks—or as I would prefer to call them, community fintechs—that are growing today are firms like Aspiration and Daylight who target specific segments of the market, and understand their unique product needs.
• Traditional marketing is far from dead. Referral marketing may be an important component of the marketing mix, but good old fashioned advertising is still needed to create awareness in a crowded market.