Defects in risk management: BaFin limits growth of N26

The banking supervisory authority BaFin sets the online bank N26 a limit for further customer growth and accuses it of poor risk management. What are the consequences for the bank and the customers?

The German financial supervisory authority BaFin has placed requirements for further growth for the Berlin online bank N26. The bank is now allowed to accept a maximum of 50,000 new customers per month in Europe. She is also assigned a further special officer who is to monitor the implementation of the measures ordered by BaFin. According to the information provided by the supervisory authority, the requirements are intended to “eliminate deficiencies, particularly in risk management”. These deficiencies are said to be “due to the strong growth of the bank”.

It is the first time that BaFin has resorted to such means: “The arrangement of a customer-related growth restriction is a novelty in German supervisory practice,” said Oliver Struck, press spokesman for the supervisory authority, at the request of tagesschau.de.

In addition to limiting the number of new customers, BaFin also limits the volume of real estate claims of the fintech start-up. That could be a setback for the bank. According to its own information, it recently grew by 100,000 new customers per month. The company only announces on its own website that it has over seven million customers in 25 countries.

Allegations of inadequate anti-money laundering measures

Lars Hornuf, financial expert at the University of Bremen, suspects that the restriction could become a problem, especially in Eastern European countries: “In Eastern Europe in particular, trust in German financial services and institutions is high and there a growth restriction could actually take effect.” The regulation could therefore become a problem for potential new customers, because the limitation includes all countries in which the bank is active.

The measures are intended “to eliminate problems in the prevention of money laundering and terrorist financing,” announced the BaFin. Most recently, the bank had repeatedly hit the headlines due to a lack of commitment to combating money laundering, for example in connection with fraudulent accounts. That is why BaFin had already imposed a fine of 4.25 million euros in June and provided the digital bank with a special watchdog for money laundering.

Attractive to criminals

According to Hornuf, online banks are attractive to criminals because the inhibition threshold is significantly lower than in the traditional banking system. “Videoident can be tricked more easily than a procedure in which you have to physically appear in a bank to open an account,” says the expert. Videoident are online video conferences for personal authentication, which are mainly used in financial technology.

Nevertheless, one cannot say that online banks in particular are susceptible to money laundering cases and that other institutes are exempt from it, according to the Bremen expert: “This is mainly due to the fact that the market share of banks like N26 is still very small.”

N26 is Germany’s most valuable fintech

Bafin’s announcement this week did not come as a surprise to customers and investors of the bank: N26 had already announced the restrictions in the course of a financing round in October. In the round, the digital bank increased its own valuation to 7.8 billion euros and has since been considered the most valuable German fintech.

The reasons for this are obvious: online banks allow an account to be opened anytime, anywhere. “The phenomenon is called Amazonization – you expect the services to be available at all times,” says Hornuf. Especially during the Corona crisis, the bank is likely to have benefited from its business model, which works independently of branches.

Customers are not affected by BaFin’s restrictions

The current measures taken by BaFin should not have any impact on the bank’s existing customers. “A possible situation in which a customer could actually feel something of the effects would be if a transfer comes from a source that is not considered to be trustworthy. But that is also extremely unlikely,” said the Bremen financial expert.

“BaFin’s orders could be devastating if the reputation of the bank and possibly the entire industry suffers,” says Lars Hornuf. Because N26 works through a platform business that depends on growing quickly: “You don’t generate any profits at the beginning. They only come when you have reached a certain size.”