"Bankers of the future will be developers, designers and risk modelling people," says N26 CEO, Valentin Stalf
Banking is like Formula One, says Valentin Stalf, co-founder and CEO of mobile bank N26. This observation came a day after Valentin returned from the famous Monza race track north of Milan in Italy, where N26 was invited as the Fast Companies Series partner by British Formula One racing team, Manor Racing. “Of course, it was very cool to see our logo there, but when you are on the grid and in the pit lane, you also realise Formula 1 is a big myth,” he says. “Just like banking, people think it is really complex. When you get closer to the action, you realise it is a group of normal people working on cars. We have debunked the myth that banking is very complex.” We chatted to Valentin about the practical steps an entrepreneur needs to take to turn a brilliant idea into a thriving business.
- This interview was originally published in FinTech Magazine
“Your success depends on your business model, your team and the customer feedback you generate.”
Simplicity is the key to the success of the N26 app and the team spends a lot of time working on algorithms that learn with customers, enabling the app to automatically classify spending into relevant categories. The app includes popular features like cash withdrawals at retailers (CASH26) and money transfers via SMS or email (MoneyBeam). “We can help people by showing them the opportunities that they have and what they’re missing out on in a complex jungle of financial products,” Valentin says.
Extreme customer focus
Any business, whether brand new or 100 years old, will say it focuses on customers. As the Uber or Spotify of banking – and to even set them apart from other neobanks – N26 takes this to the extreme: it only takes eight minutes to open an account. “For us it is about the execution and making people really love the product. On average, people log into the app at least every second day. That engagement provides many new opportunities.”
A massive game changer for N26 came on 26 July 2016, 18 months after the product launch, when it was awarded its own banking licence by the Federal Financial Supervisory Authority (BaFin) and the European Central Bank, allowing it to operate separately from other financial institutions – across the whole of the European Union. Once again, simplicity was the secret. Valentin proudly explains how, contrary to common belief, you do not need an army of consultants, a battery of expensive tools and decades of experience to comply with banking regulations.
Read the law
Valentin says the team figured out that when you are a small business and have the right IT infrastructure in place, you do not need most of the commonly used, expensive software which takes half a year to install and requires a staff of 20 people to maintain. “The most important thing is to be focused on what’s needed to comply and sometimes that means to rather read the law than listening to consultants,” he says.
As a startup that challenges the old ways, even the old ways of complying with regulations, a very good relationship with the regulator is paramount, says Valentin.
“To do it differently you need to be very close to the regulator. And you need to be very operational in what you are doing. Often the discussion around regulations is very abstract, which allows for so many companies and consultants to chip in. The main thing is to understand what the regulator wants.”
The only way to eat an elephant is one bite at a time, which is why N26’s adventure started as an unassuming debit card for teenagers and an app for parents to control their offspring’s pocket money.
“We looked at the consumer side of banking and recognised how slow the industry is in Germany and Austria,” explains Valentin, who grew up in Austria’s capital Vienna, studied in Switzerland and worked for Berlin-based Rocket Internet, which spawned many of Europe’s brightest FinTech entrepreneurs. Whereas Rocket focused on the B2B space, Valentin started seeing opportunities in the way banks interacted with their clients. “Those established players are just burning money and their fee structure is very complex. At the same time, five of their advisors will give you five different answers to one simple question,” he says.
Together with his friend Maximilian Tayenthal, Valentin launched Number26, as the startup was initially called, partnered with Germany-based financial services company Wirecard, and rapidly grew a base of 200,000 excited users. “In the beginning building our own bank sounded so big,” Valentin admits. “That is why we first we started with a pocket money solution for teenagers and went into a test phase with that. Teenagers received a prepaid MasterCard and both parents and kids had access to an app to have a clear overview of the spending.”
As entrepreneurs often find out, a good idea runs away with you. “People were using it for themselves, not for their kids. We received many calls from customers saying they wanted to use the app and the card for themselves.” Valentin and Maximilian were not taken entirely by surprise.
“Building a bank had always been on our minds. From a technological side, it is not completely different. The product we have now is very similar to what we had for teenagers: a card and an app that sends push messages. We had also already established the online signup process. It is very similar to our key selling points today.”
Once the feedback came pouring in, the next goal was their banking licence, which allows N26 to widen its platform from payments to savings, credit and investments – all from the same app but sometimes powered by partners. The banking licence changed the rules of game. “For me personally, the approval from the traditional regulator means the world,” says Valentin. “It means that we are able to be disruptive in an industry that is a thousand years old. Existing banks assumed licencing was too big a hurdle for a startup but we proved them wrong.”
It also debunked the myth that banking is too complex for new entries, he says. “You have to be close to consumers but very few traditional players understand what matters for digital natives when it comes to mobile. Bigger banks are all organised in multiple layers and a lot of unnecessary complexity is created. We saw it during the financial crisis, where no one understood what was going on. As a customer-facing business, your focus needs to be on a specific problem that the customer has – and how to solve that. It is simple. Many traditional banks use the heavy regulations as an excuse to not be innovative. For us, it is because we have the licence that we can be much more innovative and offer customers something more.”
N26’s fast ascent in Germany and Austria has been made a lot easier by recent changes in the law that allow for the use of video chat in Know Your Customer (KYC) processes – enabling customers to have their identification verified without physically having to meet with an N26 employee. So far, N26 has launched in France, Greece, Ireland, Italy, Slovakia, and Spain. While its banking licence is valid in the whole European market, associated regulations like KYC still prevent rapid expansion towards a ‘borderless bank’, says Valentin.
“The vision of the EU is great and, fundamentally, the law is there that I can pay in Austria with my account registered in Germany but some companies are still guilty of IBAN-discrimination. And underlying regulation can still be very country-specific.”
Valentin is quick to answer “yes!” when asked if a viable global bank can be started from scratch within ten years. But for now, the focus is on Europe. “We have only a little over 200,000 customers at the moment. What I have noticed is that banking needs around the world are not dependent on which country you live in but rather what your lifestyle is. It doesn’t matter if you are in Europe, the United States or Asia. You might have different appetites for investment risks, you may use a card or app more or less but you still want products like cashless payments, credit lines and investments. There are differences but basic banking needs are the same. Does our management have capacity to go into the US and China now? No, not at the moment.”
What about security, is that not something big banks have to pour millions of euros into? Is that not difficult to match for a startup? Valentin’s simple answer is that the investment does not need to be matched to reach a superior security level.
“Our advantage is that our system was built in 2015 and 2016, whereas a lot of players are using systems that are 20 years old. If you bought a car 20 years ago, it will also not be as secure as a new car you buy now – no matter how well you have maintained it.”
This brings up the classic FinTech question: are banks going to die? “Big banks have such a high market concentration. It is hard to imagine they will completely disappear but there will be a big shift in market shares in the next ten years. Bankers of the future will be developers, designers and risk modelling people instead of personal advisors,” Valentin predicts. “It is hard to transform with 100,000 employees, but the big banks – Deutsche Bank has 27 million customers – should be able to leverage their existing customer base. If you have so many customers, you can do a lot of great things.”
Product market fit
With so many FinTech entrepreneurs vying for fortune and fame, Valentin’s thoughts on the way to develop an idea into a success provide a lesson for all. “We lost the most time ourselves because we started with the product for teenagers. For us that step was necessary but it also meant our aim was lower and we were happy with ten new customers a day, while we now register over 1,000 new customers on a good day. If I could do it all over again, I would spend more time on the product market fit before starting the company.”
Launching an MVP – a minimum viable product – is much more difficult in FinTech than in other industries because there are so many regulations, says Valentin. It is difficult to start collecting proper feedback on user experience if you do not go through all the licencing steps, which requires a lot of upfront investment – both time and money. This is often the problem, says Valentin.
"People have an idea but no proof that others would use it. For example, if you ask anyone if it would be cool to transfer money anywhere in the world with one click, everyone would say yes that is cool. But how do you get a critical mass? Where is the business model?”
A sound business model with margins, which shows the complete picture, is a crucial start for an enterprise and one that quite often gets skipped over too quickly by overenthusiastic entrepreneurs, says Valentin. “Then it is also crucial to get honest feedback from customers. If I ask my friends, they’ll all say it is great but nobody will buy it, so you might need to develop your idea a bit further towards an MVP, without going the whole way. Once you have enough information, start immediately before everything is set up. The third crucial aspect for a FinTech firm is the regulatory side, but that you can usually manage,” he says.
The best team
What about the money? Are the investors not the ones calling the shots? Not at all, says Valentin: “Money is not the problem if you have the right team that executes well. There is so much money with venture capitalists and they all search for the best teams.”
N26 has raised more than $50 million to date, including a $40 million round recently. PayPal co-founder and renowned Silicon Valley investor Peter Thiel is one of the financial backers. Valentin warns his peers that feedback from investors can be extremely, though there is a lot you have to figure out yourself.
“As FinTech is a very complex field, only some very specific investors will be able to give input on your development. The majority of VCs don’t have insight to add to a business, whereas entrepreneurs like us spend 24 hours per day building it.”
Investors can contribute useful insights to market sizes, says Valentin. “It is also very important to know if they like your team. It is never bad to get feedback but you need to be the one calling the shots and take responsibility in the end. At N26 we always had a clear vision and then reflected on feedback throughout various funding rounds. Investors bought into our vision of a disruptive mobile bank and the first investors in the teenage product were rewarded – even though our strategy changed dramatically.”
Valentin says that 2017 is focused on internationalisation, growth and offering the full suite of banking products, including payments, financing, credit and longer loans – mostly through collaboration with FinTech firms that are successful in those niches. “We want to grow our customer base from 200,000 to one million and we want to work with other FinTech startups and the best products of traditional players,” he says. “We are not doing this for a fast exit. We want to build something big.”