Online-only bank N26 expects profit next year after customer limit eased

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Online-only bank N26 has halved its losses and expects to turn a profit next year after regulators eased a limit on customer numbers imposed two years ago because of worries about money laundering and other controls.

In preliminary results published on Wednesday, the Berlin-based start-up reported a 27 per cent rise in revenues this year to more than €300mn, while monthly losses had fallen to low single-digit millions of euros by late 2023, according to co-founder Valentin Stalf. Chief financial officer Arnd Schwierholz said the bank expected to become profitable “on a monthly basis” in the second half of next year.

N26 was valued at $9bn in late 2021, just before US and European start-ups were hit hard by rising interest rates. This year, the business was forced to cut 4 per cent of its workforce and in November announced that it would close its operations in Brazil.

But in its results on Wednesday, N26 said it would have enough cash to become profitable without having to raise more capital. “We are very well . . . funded,” said Schwierholz.

For this year, the bank still expects a €100mn net loss overall, a 53 per cent reduction on 2022, when the bank spent €80mn improving its fraud prevention and anti-money laundering controls after intervention by the financial regulator BaFin.

N26 co-founder Max Tayenthal on Wednesday acknowledged that N26 had in the past been “targeted” by white-collar criminals seeking to open bank accounts to commit fraud and money laundering. The bank said it was now using artificial intelligence in its screening processes for new clients and was turning down several thousand potential customers a month as a result.

“We could acknowledge 5 per cent of potential clients who were accounting for more than 90 per cent of the fraudulent behaviour,” Tayenthal told journalists, adding that the AI analysed more than 300 data points ranging from age to email address and residency when evaluating whether to adopt a new client.

He said the new system had been able to reduce the number of fraudulent transactions by more than 90 per cent and that N26 staff had been invited by Germany’s anti-money laundering agency and police to share their experiences of tackling financial crime.

Regulators have decided to ease the restrictions on N26 only gradually, to try to ensure the new fraud prevention processes are reliable. From December, BaFin will allow N26 to adopt 60,000 new clients a month, up from the previous limit of 50,000.

Tayenthal indicated he hoped all restrictions could be lifted next year and that the company would revert to its previous growth levels. Asked what would be a realistic goal, he said: “we have grown by seven-digit numbers of clients [a year] in the past”.

Despite the cap on client numbers, N26 has increased its revenue by almost 60 per cent over the past two years as existing clients have expanded their use of the bank. More than half the revenue is generated from fees and other commission income, a trend N26 hopes to speed up as it has now started to offer savings products and will roll out equities trading in early 2024.

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