N26 digital bank US entrance strategy

In my first article on digital / challenger banks, I wrote about the challenges they faces, gave some idea on product differentiation, and a formula for growth. In this 2nd article, I want to go a little deeper by looking at a specific digital bank. As someone with technical background, I used to be turned off at speech or writing that were too high level, and lack meaningful content. So, this is my attempt to not be “high level”.

I will look at N26, one of the 3 prominent European banks entering the US. I will look at its US strategy, how its product offering matches with their strategy, and provide my feedback.

N26 strategy and product

For those not familiar with N26, it is one of the most successful digital bank in Europe. The Berlin based digital bank has 4.5m users globally, and has raised $670m. It’s one of the 3 European challenger banks that have launched in the US. The other 2 are Revolut and Monzo.

N26’s US strategy according to its US CEO Nicola Kopp is “targeting America’s outer-city rural demographic who had been “burned” by credit”. Basically, focus on underbanked in the US. This is one of the most popular group targeted by challenger banks because

1. Typically under served by incumbent banks
2. They are charged with most penalty fees
3. Big population, half of the US live pay check by pay check.

Looking at the current product offering for N26 in US:

No hidden fees (no account maintenance fee), personalized money saving goals, free cash withdraws, 2 days early pay check, control your card (change pin, lock card, payment abroad, online payment), instant notification, send and receive money instantly with other N26 users.

Now, all of the features above except the 2 day early access to pay are standards of almost any digital bank these days. While 2 days early access is an important feature for those living pay check to pay check, it falls short on product differentiation compared to its competition. For example Chime, probably N26’s biggest competitor in US, also has overdraft protection of up to $100.

Digital bank is not a novel idea in US. Chime was founded in 2013. I think for a new entrants to compete with incumbent that focus on the same user base by offering less product features is a tough sell anywhere.

The strategy can work, but N26 needs to win the consumers over by providing superior products that provide real value.

The bank should think of a suite of product features targeted specifically to the underbanked or paycheck to paycheck. Such as:

1.Provide tools to help save:

1. Top up piggy bank: round up to whole number at every transaction. Save the change in a sub-account (piggy bank).
2. AI advisor on spending advise and finding cheaper alternatives: i) Spending advise: provide advice pre-purchase, such as purchase suggestion. ii) Finding cheaper alternatives: help find cheaper option. For example, before you enter Applebee’s, the advisor will search nearby restaurants that offers discounts. Then, present the user with cheaper alternatives.
3. General money saving tips

2.High yield saving account to encourage saving

3.Overdraft protection:

1. By providing protection up to certain amount or just don’t let the transaction go through， or trigger loan to cover the amount, early wage access

4.Partner with payment company that provide early access to wage such as DailyPay

5.Provide easy access to small sized loans, short term, small sized loan, easy access, quick turnaround. The loan can be based on user’s paycheck, cars…,etc. Should be innovative to make access easy and cost effective for consumers.

6.Tools to help customers find the best money saving option to pay back debts

The strategy can work, but I believe we will need to see a better product. Launching a business in a foreign country is not easy, so N26 needs to give users reasons to use their app, if not to love it. Financial services is difficult to crack because of the regulation, but start-ups can’t let that be an excuse for lack of innovation. N26 just launched in US, and there is definitely a lot more in its product road map than ones that meets the eye. But I can only base my analysis on what’s already in the public. I certainly look forward to more product offering from N26.

My analysis

In terms of strategy, I frankly would have targeted a different group, ones with more need for foreign currently (FX). Looking at N26’s origin, it started by offering superior FX solution than the incumbent.

While I don’t believe in one solution fits all countries, and localization is critical to successful market entry, I think the best market entry strategy is one where you localize and leverage your original strength to achieve the most powerful competitive advantage. By targeting the underbanked in the US, I am afraid that N26’s superior FX offerings and international presence won’t be of much use. If the target was underbanked who are immigrants with need to send money home, I think would have been a much more compelling focus group for N26.

I would position N26 as the best bank for international money transfer in US. The user group can target foreign worker, immigrants, students who study abroad, or international busines travelers. Consumes will get the best FX rate and lowest fee for money transfer and spending abroad. In fact, N26 can leverage Transferwise’s borderless account since Transferwise already is its partner. Which ever group or groups to focus will need further study on whether pain points exist. The key here is that it’s important for digital banks to leverage all its strength as they enter new markets.

Conclusion

In this article, we looked at N26’s strategy and product offering. My take is that N26 needs to offer more differentiating product features and should leverage its super FX solution and international presence. I know it’s easier to sit on the sideline and criticize. Entering a new market is never easy especially the US. As a fintech enthusiast, I sincerely hope that N26 will do well, and become a market entry success story.