Europe’s challenger banks are challenging (and worth more than many old banks)

We talk a lot about neobanks and challenger banks, but how are they doing in reality? Well, they seem to be doing pretty well. By way of example N26, the Germany-based bank start-up, is now the second most valuable bank in Germany behind Deutsche Bank. It’s worth more than Commerzbank. Not bad for an eight-year-old bank.

N26 now has 7 million customers across Europe and the U.S. and is on track to process $90 billion in transactions this year.

But their $9 billion valuation is way behind Revolut who, after their last funding round, are a unicorn worth $33 billion. This is just a six-year-old and yes, it is a bank. It launched its bank services in Austria the other day, marking the 13th country the bank has made a mark in.

Revolut is the most valuable UK tech start-up in history and the eighth biggest private company in the world, worth an estimated US$33 billion, according to CB Insights. Revolut has more than 16 million customers worldwide and sees over 150 million transactions per month. 

Starling Bank is another challenger unicorn, securing a £50 million investment from Goldman Sachs this year and moving forward into France and other territories.

Since launching in 2017 Starling has attracted more than 2m customers and is one of the few challenger banks to have turned a profit in the past year.

Zopa joined the challenger bank hordes recently and has also achieved a unicorn status:

Zopa — a neobank with some 500,000 users in the U.K. where it provides peer-to-peer lending, savings accounts, credit cards and other services — has raised $300 million, at a valuation that we’ve confirmed to be $1 billion (£750 million) post-money.

What is interesting in these pricings is how fickle the market can be. For example, Atom Bank’s valuation halved between 2019 and 2021.

UK challenger Atom Bank has confirmed a £40 million fund raise at 60p-a-share, just under half the price at which it raised equity in 2019.

That’s a bit surprising as Edward Twiddy, Chief Customer Officer, said:

“It’s been a really successful year for Atom, delivering our first month of operating profit in June, surpassing the £3bn mark in mortgage lending in July and reaching £1bn of deposits into Atom’s Instant Saver product too. We were delighted to have made the 1,000th secured loan to an SME customer earlier this summer and now, passing the £1bn mark in SME lending is another significant milestone that we can check off.”

Maybe it's because of their shareholders?

Neil Woodford’s Woodford Patient Capital Trust was among the bank’s largest shareholders, before the Woodford operations' rapid demise in 2019. Today the Woodford Patient Capital Trust has been rebranded the Schroders UK Public Private Trust, and as part of the transition Schroders is attempting to diversify its assets away from the unlisted private equities for which Woodford was so fond. According to Sky News, this has meant that Schroders is not participating in this round, leaving other backers to pick up the slack.

Equally, some of the challengers do have issues.

Monzo seems to be struggling a bit after co-founder Tom Blomfield left, and their latest valuation is also down:

The Series G round has so far been led by existing shareholders and a new venture capital firm, Octahedron Capital. The £60 million raised in December was also a down round, with Monzo having a valuation of £1.25 billion, down 40 percent from its previous valuation of £2 billion.

I raised these issues recently as I can see quite a bit of anti-Monzo sentiment online. For example, there’s a group on Facebook called Monzo stole our money. It’s a group of customers who have had their accounts suddenly shut down and number in the thousands.

Is there a good way to shut a customer down?

But then, in a recent post, it turns out lots of scammers are using Monzo accounts to steal from others.

Millions of pounds have been stolen from Barclays accounts after the bank fell victim to a series of orchestrated attacks by a fraudster using a Monzo account. Criminals used a new money transfer method known as a payments initiation service provider (Pisp) to carry out a string of thefts on unsuspecting customers, Barclays found. All victims have been reimbursed. Pisps allow retail consumers to pay companies directly from their bank account rather than using a debit or credit card through a third party such as Visa or MasterCard. It comes as Monzo is under investigation by the Financial Conduct Authority for potentially breaching financial crime controls and anti-money laundering rules.

Maybe this is part of the reason why Monzo is closing accounts left, right and centre.

All in all, we have a wave of European start-up banks who are achieving amazing things. They just need to do the due diligence to make sure that whatever amazing things they achieve are achieved within the rules and regulations of the industry. Now, there’s a thought.