Europe's neobanks find U.S. market tough to crack

European digital financial services upstarts like N26 and Monzo were able to attract investors to fuel a U.S. expansion, but recently scaled back their plans and refocused on their home markets after encountering a crowded American market.

N26 on Thursday said it would discontinue U.S. operations after Jan. 11 and would focus on its European business, where it would add new financial products such as investments. N26's decision is the second setback for a non-U.S.-based challenger bank in the past month. The London-based Monzo in October withdrew its application for a U.S. banking license after reportedly being told it would be turned down.

Both companies faced steep competition in the U.S. and a difficult path to obtain licensing, factors analysts say will confront other non-U.S. challenger banks that try to establish a foothold here or scale existing American operations.

"The U.S. is a market that already has a burgeoning community of neobanks and fintechs offering specific and tailored services to their customers," said Zil Bareisis, head of Celent's retail banking practice in London.

Though it raised $900 million in October, pushing the company’s valuation past $9 billion, N26 faced a $5 million fine from German regulators in June for late submissions of money laundering reports, a ruling that included a limit on new customer onboarding.

N26 also laid off 10% of its New York office in May 2020, citing impacts from the pandemic, and U.S. CEO Nic Kopp left N26 in March 2020. N26 pulled out of the U.K. in February 2020, saying that because of Brexit, its European banking license would no longer be valid in the U.K.

N26, which was founded in 2013, launched in the U.S. in August in 2019 with a mix of mobile account opening and a virtual card that supports Apple Pay and Google Pay. It offers ATM availability via Allpoint and early wage access for direct deposit consumers. N26 does not have a U.S. banking license and has used Axos Bank, a $14 billion asset-bank based in San Diego, as its U.S. partner. N26 signed 250,000 U.S. consumers within the first five months of its U.S. launch, and it currently has about 500,000 American customers out of 7 million total customers in about two dozen countries.

Monzo's decision to not seek a U.S. banking license came amid a mix of fast growth and steep economic losses. Despite boosting its revenue between June 2020 and 2021 from $27 million to $91 million, Monzo reported an after-tax loss of about $150 million, after reporting a $64 million loss the prior year. Monzo did not return a request for comment.

"As they get larger, challenger banks are starting to face the same challenges as traditional banks, such as regulatory scrutiny and market saturation," said Dylan Lerner, a digital banking analyst at Javelin Strategy & Research, adding that challenger banks both in and outside of the U.S. will need to diversify through partnerships, licensing or buyouts. Oportun's recent acquisition of Digit, a deal that involved two American firms and will allow Oportun to quickly add financial services, is a good example, Lerner said.

At the time of its U.S. license withdrawal, Monzo said dropping its U.S. bank charter application would allow it to invest more heavily in the U.K. while it continued to build its U.S. business through a partnership with Sutton Bank in Ohio.

"It’s not easy for any challenger to scale, and particularly given the pressure COVID-19 has placed on challenger banks to reassess their path to break-even, rather than relying on investor funds to support customer growth and product development," said Kieran Hines, a senior analyst in Celent's banking practice in London. "[There are] challenges that arise when startups look to stretch themselves with entry into such a large and competitive market."

Other European challenger banks that are pursuing the U.S. include London-based Revolut, which is applying for a banking charter in California and deposit insurance. Revolut is focusing on remittances in the busy U.S.-Mexico corridor to build an audience in the U.S. In an email, Revolut's public relations office said the company has submitted a draft application for a U.S. banking license and launched business accounts in the U.S. In September, Revolut Securities was approved as a licensed broker-dealer in the U.S, allowing it to launch commission-fee stock trading.

In the case of Monzo and N26, while both have done well to date in Europe and hoped to expand in the U.S., each has come under pressure to refocus on their core operations, according to Hines.

European challenger banks like Monzo and N26 compete in the U.S. with traditional banks as well as U.S. neobanks such as New York-based MoneyLion, which has more than 7 million users and is developing a financial services marketplace with partners such as Nationwide Insurance. Another U.S. challenger bank, San Francisco-based Chime, has about 12 million users and recently raised $1.5 billion. Chime has run into regulatory trouble, with California in May ordering Chime to remove the word "bank" from its branding.

While U.S. challenger banks work with licensed bank partners, many European challenger banks have licenses in Europe. Monzo and N26, for example, both have U.K. banking licenses.

"Many European challenger banks have found that getting a U.S. license is a long and difficult process," Bareisis said.