One of the greatest hopes of the German economy can be found in Berlin-Mitte, in a backyard not far from the Jannowitzbrücke: the N26 smartphone bank, a digital model company and proof that banking can be redesigned in the 21st century. It has long held a prominent place in the German start-up line-up, and now that the company is not so young, the founders are aiming for the stars. A valuation of more than ten billion euros seems to have become possible with the new round table currently underway, and N26 wants to set the tone in the structure of European neo-banks. Even Commerzbank, Germany’s second-largest private bank and a former Dax group, has only a market value of 6.4 billion euros.
It seems that N26’s ambition has overlooked some of the duties that banking business brings with it. Until the Bafin financial supervisor loses patience. Due to shortcomings in the organization of the company, the supervisors recently threatened to limit the new activities of N26. According to a Handelsblatt report, this could mean restrictions on accepting new customers and conditions for future expansion abroad. According to the banking law, the Bafin can take such measures if an establishment “does not have an appropriate commercial organization”.
Too many start-ups, too few banks
In other words: apparently, from the point of view of the community, N26 is still too much of a start-up and not enough of a bank. The dispute with the Bafin enters a new cycle after a short time with this new level of escalation. It was not until May that the smartphone banking authority sent a special representative for the prevention of money laundering into the house. As early as 2019, after a special audit of the bank, Bafin complained of significant deficiencies: among others, in the prevention of money laundering, compliance and IT. A Bafin spokesperson declined to comment on the new allegations on Friday in reference to confidentiality obligations.
Years ago, N26 was one of those institutions whose accounts were disproportionately used in fraudulent online stores. In doing so, criminals abuse accounts opened by deceived third parties – or with forged documents – and collect money for goods offered online but never actually sent. Recently, reports of N26 issues with these so called fake stores have increased again. “N26 undertakes to implement all of the aforementioned points”, had again promised the bank in May after having ordered it by Bafin. The weaknesses apparently persisted.
On Thursday evening, N26 responded with an equally docile press release, introducing a new risk manager and appointing a money laundering official. He claims that there is an “open and constructive relationship” with the supervisory authorities. We now want to focus on four areas, among others: intensified cooperation with supervisory authorities, “strengthening governance, risk and compliance functions” as well as “combating financial crime” – in other words in the The whole range of what Bafin is doing has repeatedly warned the institute. Upon request, N26 did not announce until Friday that it was working closely with the authorities and the special adviser. “We cannot comment on the details of our cooperation with regulatory authorities,” a spokesperson said.
N26 accounts as a commodity in the Darknet
On the other hand, the company openly admits the issues with so-called fake stores and fraudulently used accounts. Across the banking and fintech industry, online fraud and financial crime cases have increased, according to the bank’s statement: “Accelerated by the corona pandemic, we have also seen an increase in fraud cases and behavioral patterns. fraudulent at N26. ” The problem: Fraudsters under the guise of luring unsuspecting new customers and letting them open an account with N26 on their behalf, supposedly for testing purposes. Account details are then used for online scam methods or traded like goods on the darknet, the isolated part of the internet – as “bank rejections” there are active bank details at a flat rate. And a German IBAN builds trust with bona fide customers who fall in love with bogus online stores.
Bafin, on the other hand, does not rely on trust, he prefers to tighten controls. Apparently, it’s only a matter of time before authorities implement their threat and order restrictions on new cases. From the point of view of N26 founders Valentin Stalf and Maximilian Tayenthal, the timing could hardly be worse: the valuation of their eight-year-old bank ultimately depends heavily on its continued growth history. If fewer new customers arrive on the orders of the supervisory authority, this can distort the calculation – and the desired high valuation could be jeopardized. The company has not commented on the extent to which dissatisfaction with the financial supervisory authority weighs on N26 in the current funding round.