N26’s $100M funding spotlights a rush to digital models amid coronavirus pandemic

German challenger bank N26 has drawn a fresh $100 million investment, signaling a flow of capital to firms with a longtime focus on automated transaction rails.

But the strength of the post-coronavirus recovery will determine if that's enough to battle well-capitalized banks.

The $100 million investment was led by Tencent and Peter Thiel’s Valar Ventures, both existing investors that participated in N26’s Series D investment round. That round now totals $570 million. N26 has raised a total of $770 million in its history.

N26’s new investment follows Stripe’s recent $600 million fundraising round, which it put toward a bundle of coronavirus-related products, such as providing faster access to capital. N26 will use its investment to bolster its digital banking and financial services technology. Both Stripe and N6 offer expedited access to payments and financial services as a competitive play against traditional banks.

As economies reopen after lockdowns, the battle between challenger banks and traditional banks will continue with different terms. The struggle for neobanks is that many are working with risk models that have not been tested during an economic downturn, while the issue for traditional banks is managing large branch networks that were seeing less traffic before the crisis — and practically none during the outbreak.

Neobanks can stay nimble because they "don’t have the legacy technology,” said Sanat Rao, chief business officer and global head of Infosys Finacle. “But once the pandemic is behind us, these neobanks are firms that are not backed by the same strength of capital that a large bank has, but are still funded by private equity.”

The economic crisis born of the coronavirus pandemic is apparent in the recent investments. Stripe’s valuation remains at $36 billion while N26’s valuation is still $2.5 billion. But given the overall pressure in the technology market, the bets on Stripe and N26 suggest a value in providing quick access to digital commerce.

“People don’t want to leave their houses to open a new account, they don’t want to go into a branch,” said Nicolas Kopp, N26’s U.S. chief executive.

Stripe’s core model is enabling merchants to accept digital payments, a strategy it’s expanding to new merchant types as more retailers migrate to digital. N26’s strategy relies on fast account access, opening new accounts in about five minutes, with minimal brand interaction.

“The future for money management and financial interaction has been forced onto people in a few days, actually in a few hours in some cases,” Kopp said. “So we're seeing these behavioral changes as a response to external forces.”

N26 was founded in 2013 as a digital payments company in Germany, and has gradually expanded to other European markets and the U.S., using free accounts and products that encourage savings for vacations or donations. Increasingly, these savings features are being used to fund more general purchases such as household goods, Kopp said.

The firm competes with other neobanks such as Monzo and Revolut, which just launched its bank in Europe. Most of these companies started with payment transfer apps and added other financial services over time.

N26, which has a banking license in Europe but uses Axos Bank to make loans in the U.S., had faced some recent headwinds before the virus hit. It pulled out of the U.K. in February, citing Brexit. But it has also used partnerships with mobile wallets such as Apple Pay to extend its reach in markets such as Spain.

N26 says its model is less reliant on sudden shifts in consumer spending since it’s entirely online and is built for a world of contactless and NFC transactions.

N26 has done internal research that has found people are shifting their spending. Grocery and food stores have seen a 25% increase while restaurant spending has seen a 39% decrease over the past two months, for example. But that informs N26’s product and consumer engagement strategy more than its technology.

“We are agnostic as to where you spend as long as the merchant uses a card or an app for that purpose,” Kopp said. “I don’t foresee a lot of adjustments to our technology platform because of where people are spending.”