N26 is following Revolut into regulatory hot water

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Germany-based neobank unicorn N26 is under investigation from German banking regulator Bafin after reports emerged about potential fraudulent transactions and issues with the neobank’s customer service, according to City A.M.

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Customers were unable to get responses from chatbots and emails for several weeks, and one instance included a customer reporting fraudulent activity, which was ignored and led to a theft of €80,000 ($90,224). N26 was also criticized by other banks that reported not being able to communicate with the neobank about criminal activity and fraud.

Here’s what it means: As neobanks grow in size they need to ensure they can keep up with their regulatory obligations.

Bafin identified shortcomings in terms of staffing, outsourced task management, and engineering. These shortcomings could relate to N26’s fast growth: Its customer numbers grew from just 100,000 in January 2016 to 2.5 million in February 2019. Keeping up with its expansion pace and staying compliant — especially as it looks to introduce its services to the US this year — is key.
This isn’t the first time controversy around N26 has emerged. In October 2018, it was reported that consumers were able to open bank accounts with N26 using fake passports, per TechCrunch. This could have allowed criminals to open bank accounts for illegal activity, and could have resulted in hefty fines for N26.
However, N26 is in close contact with Bafin about the latest accusations. The bank has said that it will review the findings promptly in order to remain compliant and meet all requirements, per City A.M. Additionally, N26 has tripled the number of employees in its customer service division in the last year, which could help ensure better communication in the future.

The bigger picture: As neobanks enter the next stage of their development, they may have to work with third parties to ensure compliance.

N26 isn’t the only neobank that’s come under regulatory scrutiny, but compliance is key for future success. The UK’s Financial Conduct Authority (FCA) has reportedly reached out to UK neobank Revolut due to concerns over its security processes. Neobanks have been focusing on establishing themselves over the past few years and have been able to attract large user bases due to these efforts.

However, this growth comes with increased challenges in ensuring compliance. Hence, neobanks would be wise to focus their efforts now on meeting regulatory standards, and should consider working with regtechs specializing in the field to help them protect against fraud or money laundering instances — and thereby increase customer satisfaction and ensure future success.

Here’s the industry’s opinion, as told to Business Insider Intelligence:

"N26’s challenges are a microcosm of those facing incumbent banks, where much more complex product offerings, legacy tech, and geographical complexity — especially in compliance and KYC — are crippling whole business lines. For example, one European global bank has effectively stopped onboarding new customers because of a mismatch between regulatory expectations and their technology." — David Buxton, Arachnys founder and CEO

"The success of challenger banks like N26 demonstrates the demand for truly digital banking solutions. But their incredible growth rates also make them susceptible to compliance issues. However, technology-driven solutions are emerging on the regulatory side, allowing efficient handling of legal and compliance requirements." — Ralf Huber, Apiax cofounder

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Source: Business Insider – feedback@businessinsider.com (Lea Nonninger)