From regulatory loops to jump through to massive competition, European challenger banks have many obstacle to overcome if they want to expand across the pond.
The last year has been huge for European challenger banks. Monzo raised a £113m Series F round in June 2019. The following month, German neobank N26 bagged $470m in a Series D round that saw it achieve a $3.5bn valuation. It extended the raise with another $100m in May 2020 in order to weather the Covid-19 storm. In February Revolut closed a $500m funding round and secured a $5.5bn valuation, making it arguably the most valuable FinTech unicorn in Europe, sharing the top spot with Swedish venture Klarna that achieved the same valuation last summer.
Similar stories can be told about bunq, indó, Lunar, Starling Bank and a smattering of other neobanks across the continent. However, even though the last 12 months have been good for the industry, no European challenger bank has so far made it big in the US.
It’s certainly not for a lack of trying. After several years of speculation, Monzo finally announced in June 2019 that it was going stateside. But rather than making the leap across the Atlantic with a bang, the company has so far only made a whimper. At the moment it is only operating a limited test of its banking app in partnership with Ohio-based Sutton Bank.
Similarly, Revolut has been talking about setting up shop in the states since 2018 but only went live in the country in March 2020. Revolut set up an arrangement with Metropolitan Commercial Bank. And N26 set up shop in the US in August last year and claimed to have over 250,000 customers in the nation in January 2020.
Nevertheless, the European vendors are still behind their US-native rival Chime in terms of monthly active users. The neobank still controls roughly 60% of the country’s market, according to recent research from Apptopia.
At the moment, there are three big reasons holding European challenger banks back in the US.
The first reason for the lack of an impact is the same reason why most of modern life as we know it has been put on hold over the past five months: the coronavirus. The pandemic sweeping across the globe has caused some serious headaches for businesses around the planet, saying nothing about the heartbreaking human cost. The FinTech space is no different.
As we have reported in the past, European challenger banks responded swiftly to the pandemic by introducing a range of measures to protect both staff and customers from the fallout of the virus such as remote working. Nevertheless, it’s no secret that many of them have had their fair share of problems on the back of the global healthcare tragedy.
Revolut and Monzo offer two good examples of how the sector has been affected. Even though both of them were quick to shut down the rumours that they were going bust that circulated at the end of March, they have faced their share of coronavirus issues.
In order to keep the company running, Monzo has closed its Las Vegas office and laid off the staff working there. Moreover, it is now reportedly looking to fire 120 more people. Add to that the news that it is looking to raise a new investment round at £70m and £80m, but at a rumoured 40% reduction of its valuation, and it’s clear that the company is having its fair share of problems.
Revolut has also had to tackle issues related to Covid-19. The neobank has had to cut about 3% of its global workforce. A Wired exposé alleged that the challenger bank had potentially broken employment laws by coercing employees to quit on their own accord or to face being fired with no severance. Revolut has denied the accusations, saying it broke no laws.
Undoubtedly, cutbacks like these caused by Covid-19 will limit European challenger expansion plans across the states.
That being said, the pandemic could also benefit neobanks in general if they can survive the downturn. For instance, Revolut’s CEO has said the crisis could make it easier to acquire companies to help the neobank boost its offering in the future. Additionally, there is an apparent trend that more people are embracing cashless options to avoid infection, a development that could also benefit neobanks. Nevertheless, while Covid-19 could present the sector with some opportunities, it is doing nothing for European challenger banks’ US expansion plans right now.
Going to the US is a big deal for many challenger banks and it’s easy to see why. The US is the largest country contributing to the growth of global digital banking market in the world, according to Valuates Reports. Back in 2017, the North American market took up about 48.73% of the global market, with Europe and the Asia-Pacific respectively only taking up 30.22% and 16.54%. The region is also expected to keep growing over the foreseeable future. And with 328 million people living in the US, that’s a lot of potential customers to share amongst the new players in the market. “It’s not a winner-take-all market,” as Nicolas Kopp, US CEO of N26, is reported to have said.
However, the size of the market also means that European challenger banks are going to face a lot of competition and not just from the US-native neobanks that have been founded in the past few years. They must also go toe to toe with the traditional players that are already there.
“The size of the US is also challenging with 6,500 incumbent banks, many of which are localised in their communities, and whilst many are undoubtedly ripe for disruption this could prove a challenge,” says Anthony Quinn, founder and CEO of Arctic Intelligence, when speaking with FinTech Global.
The Australian RegTech company was launched in 2015 and has since set up offices in Hong Kong, New Zealand, Singapore, South Africa, Brunei, Europe, the UK, Canada and the US. “At Arctic Intelligence, we have been facing similar challenges as we have started to win clients in the North American market and have been understanding the lie of the land and looking to identify strategic partners to work with that already have a significant presence and customer base, so that is something that they should be looking to leverage,” Quinn continues.
The fragmented regulatory landscape
Regulations are another major hurdle for European neobanks considering a US expansion. To simplify it, any EU-based challenger bank only has to get approval to operate in one member state to open shop across the entire European Economic Area.
“The US, by contrast, has not only federal regulation to comply with but a variety of different state regulations too,” says Annie Eser, account executive at Ascent, the RegTech startup. “As an example, UK-based banks are used to three primary regulators within the UK – PRA, FCA, and Bank of England. US national banks are subject to at a minimum of 11 federal regulators, not including their state banking regulators. Understanding this complex regulatory landscape and ciphering out which regulations apply at these various levels can be a challenge.”
European challenger banks might encounter both a legislative focus on consumer protection and nuanced legislation around themes less prevalent than on their home turf. “Further complicating this is the lack of cohesiveness in US legislation,” says Eser. “For example, with data privacy, when transacting in Europe and the UK banks have one regulation to contend with – GDPR. But in the US there is a patchwork of various data privacy regulations — none, to date, nearly as restrictive as GDPR, but collectively creating a landscape that’s more complicated given its fragmented nature.”
And then, once these venture understand the complex web of regulations, they still have to actually get approval from the sluggish regulatory machinery in the states.
For instance, Monzo applied for a banking licence with the US Office of the Comptroller of the Currency in the end of April. Being approved would mean that Monzo could offer FDIC-insured deposit accounts without the help of a partner bank. However, few expect that the process will be completed any time soon as it is more stringent than similar ones in Europe. Varo Money, the mobile banking platform that raised $241m in its Series D round in the beginning of June, received a preliminary approval from the Office of the Comptroller of the Currency back in 2018, but still doesn’t have national chartered banking licence.
So if European digital banks want to be big in the US, then cutting through the red tape is a considerable challenge they must overcome.
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