(Bloomberg Opinion) -- Defying the gloom around the financial services industry in post-Brexit Britain, the U.K. has maintained its edge in fostering the industry's digital revolution. Lured by friendly regulators, fintechs have proliferated and investors have poured billions into companies that have rattled centuries old, high-street lenders. The battleground is becoming so fierce, however, that it’s proving too much for some of the upstarts.
Blaming the U.K.’s decision to pull out of the European Union, Berlin-based N26 GmbH says it will close all of its U.K. accounts by April, affecting several hundred thousand customers. Elsewhere, it says its global ambitions are unaffected. The mobile banking app, which has a $3.5 billion valuation, will keep chasing growth in the U.S., where it has a partnership with another digital bank, and in the EU, where it has more than 5 million customers in 17 countries.
The additional regulatory burden associated with Brexit will have certainly played a role in N26’s own exit. The lender, backed by billionaire Peter Thiel and China’s Tencent Holdings Ltd., would have needed a U.K. banking license once “passporting rights” (which allow finance companies to work seamlessly between the EU and Britain) lapse. That will have accelerated a decision on whether to commit to the U.K. market, whose complexity and cost N26 underestimated when it launched there 18 months ago.
However, N26’s departure, which follows that of another German mobile lender, Fidor Bank, says more about the competitiveness in the U.K. than the fear of Brexit red tape. Even for a company that famously dissed profitability as a long-term goal, being an also-ran in a cutthroat market had limited appeal.
The latecomer has faced intense rivalry from fintechs and big banking incumbents alike, with most offering cheap international services and better data on spending. Lacking a clearly distinctive product, the lender has found itself up against more entrenched rivals, from Monzo (which boasts 3.9 million U.K. accounts) to Revolut (with 3 million British customers) to Starling Bank (1.5 million accounts).
Meanwhile, funds are pouring into fintech startups. Investment in the U.K. sector surged 45% to $2.9 billion in the first half of 2019 compared with the same period in 2018, according to data compiled by Bloomberg Intelligence. Revolut is reportedly in talks to raise $1.5 billion, while Starling has just raised another 60 million pounds ($78 million). Monzo is reportedly seeking up to another 100 million pounds.
The big U.K. lenders have also been plowing cash into their own apps to be more like the fintechs, and adding entirely new ones. Royal Bank of Scotland Plc reportedly spent 100 million pounds to launch digital lender Bo last year. Bo will be a success, according to RBS, if it makes a profit even while remaining a secondary account for clients — that’s a challenge most of the fintechs are still trying to overcome. In June, Monzo said just 30% of its active users deposit at least 1,000 pounds, a threshold that it says denotes customers paying their salaries into its accounts.
For N26, Brexit offered a neat way to explain its retreat. But without a certain path to profitability, competition from old and new players will keep the pressure on digital banks in the U.K. and beyond.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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