Despite legal and pandemic-related business challenges, the challenger bank space in the United Kingdom and European Union is brimming with potential, buoyed by growing investor interest and increasing customer sign-ups.
The U.K.’s Monzo is the latest firm to secure fresh capital after Chinese technology giant Tencent made a $100 million capital injection for a minority stake in the firm, as part of a $600 million fundraising round that values the British digital bank at $4.5 billion.
Related: China’s Tencent Takes Stake in UK Challenger Bank Monzo
Tencent’s interest in Monzo is an indication that better times are ahead for the bank, which has been dogged by questions about profitability as annual losses widened between the 2020 and 2021 financial years, not to mention a potential anti-money laundering (AML) lawsuit in the U.K. which could result in criminal and civil liability.
See also: Monzo Faces FCA Investigation Into Alleged AML Contraventions
Founded in 2015, the high-profile neobank also suffered plummeting valuations as a result of pandemic-induced card transaction declines, but the bank’s value has gone on to improve 300% since the beginning of 2021, helped by a 23% increase in user sign ups and new product launches.
Read more: UK Digital Bank Monzo Raises $500M at $4.5B Valuation as it Readies for Crypto
One of those was the introduction of a buy now, pay later (BNPL) product in September, making Monzo one of the first U.K. banks to venture into the fast-growing but controversial BNPL sector dominated by industry heavyweights Klarna and PayPal.
Read more: Revolut Bank Granted Full EU Banking License Amid Criticisms of Unfair Competition
Another challenger bank making waves in Europe is FinTech unicorn Revolut, which started as a money transfer service in 2015 before expanding its services to include digital banking, stock trading, cryptocurrency and more for its 16 million-plus customers worldwide.
The firm, considered the U.K.’s most valuable private technology company with a valuation of $33 billion, was recently granted a full banking license by the European Central Bank (ECB), allowing it to issue consumer credit among other services to customers in more than 15 European countries.
See also: Revolut’s $33B Valuation Reflects The Promise Of Open Banking
But despite its EU banking license, Revolut is not yet a full-fledged bank on its home turf of the United Kingdom. To rectify that, the challenger bank has applied for a U.K. banking license to upgrade its e-money institution license which is expected to be granted sometime this year.
Local competitor Starling Bank, however, is fully licensed by the U.K. regulator and has plans to offer its Banking-as-a-Service across Europe, including France, Germany, the Netherlands and Spain, in the first half of 2022.
Last July, the U.K. startup announced its first acquisition, Fleet Mortgages, in a 50 million pound deal (more than $69.1 million) that is part of a larger plan to boost lending through strategic arrangements, organic lending and targeted mergers and acquisitions, the bank said in the announcement, PYMNTS reported.
Read also: N26 Close to Getting $800M In Funding Round
Outside the U.K., German rival N26 is another strong contender in the European challenger bank space. The Berlin-based digital bank more than doubled its valuation to $9 billion in a $900 million Series E round in October, bringing its total funds raised to $1.7 billion in funding since its inception.
The direct bank has added several financial services to its portfolio since launching in 2013, offering business bank accounts, loans, electronics insurance, and cashback programs to over 5 million customers worldwide.
But like Monzo, the company has come under fire for anti-money laundering (AML) reporting irregularities, leading to the payment of a $5 million fine in July for the late filing of about 50 suspicious activity reports in 2019 and 2020.
US Expansion Not for All
For European neobanks looking to extend their businesses across the Atlantic, it has not all been smooth sailing.
Germany’s N26 recently announced that it will close its U.S. operations as of Jan. 11, 2022, less than two and a half years after it launched there and attracted half a million customers. The decision to shutter its U.S. branch has been widely attributed to the pandemic which forced the company to lay off 10% of its New York workforce.
Read more: German Digital Bank N26 Shutting Down U.S. Operations
Prior to that, London-based FinTech Monzo pulled back its application for a U.S. banking license, a decision that was made following discussions with regulators at the Office of the Comptroller of the Currency, according to a PYMNTS report, per CNBC.
Related: Challenger Bank Monzo Abandons US Banking License Application
The U.K. firm began the process of applying for a U.S. banking license back in April 2020 to broaden its customer base from the current 5.5 million account holders it has in the U.K., according to its website.
But while its European competitors abandon their American dreams, Revolut is still holding on.
Last year the U.K. unicorn applied for a banking license in the U.S., where it has 300,000-plus customers. According to company Co-founder and CEO Nik Storonsky, that move is an integral part of its journey to “build the world’s first global financial super app.”
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More