N26, a German fintech startup that was valued at $3.5 billion last July, has decided to pull out of the UK market, citing Brexit-related reasons for the decision. But the circumstances surrounding the company's decision suggest there may be more to the story.

In October, N26 wrote in a post that its UK customers would "not experience any changes" following the end of the month—the originally planned Brexit date. That post has since been removed. Now the company maintains it will be unable to continue its UK operations with its current European banking license. In a statement emailed to PitchBook, N26 wrote that it had decided not to apply for a UK banking license after parliament passed the withdrawal agreement to leave the EU at the end of January.

"As a European bank with a European banking license, we would need to undertake complex regulatory measures and product updates in order to continue operating in the UK," the company wrote. "A separate license for the UK would require significant operational processes and costs."

The company, which provides a mobile banking app, entered the UK market in 2018, after the 2016 Brexit referendum but before there was any clarity on whether it would happen and under what terms. Local competitors like Starling Bank and Monzo had already been in the market since 2014 and 2015, respectively. Without the first-in advantage, N26 reportedly signed up around 200,000 users, while Starling Bank has 1.25 million.

It is a crowded space: The 1,600-plus UK fintech companies are estimated to double in volume over the next decade, according to the UK's Department for International Trade. Alexandra Frean, head of corporate affairs at Starling Bank, said that while the industry is competitive, companies aren't "cannibalizing each other." Rather, she explained, the competition is with traditional banks: "When you look at it this way, the market is massive."

Nevertheless, it's plausible that Brexit could motivate a startup like N26 with a predominantly European user base to leave. With around 5 million users, only 4% of its customers are located in the UK. In order to retain them, the company would have to make a substantial investment of time and capital to overcome new regulatory hurdles.

Peter Cunane, national and international strategy lead at nonprofit Innovate Finance, said that European and British fintech startups seeking to scale overseas will face additional challenges, like losing passporting rights to do business across borders, possessing the appropriate banking license and having the regulatory approval to do so, which could deter investment decisions around the UK or EU markets. He added that until more details about the UK-EU trade deal are known, it's difficult to know what the regulatory requirements will be or how far the UK financial system will diverge from that of the EU.

EU's lead Brexit negotiator Michel Barnier reportedly told the European parliament this week that British politicians "should not kid themselves" that the UK would get a special deal for financial services upon upcoming negotiations of the regions' future relationship.

Regardless, Starling's Frean says that while the exact terms of Brexit remain unknown, she is doubtful that N26's departure signals a wider exodus of fintech businesses from the British market. "The UK is full of agile fintech startups and bright people who will figure out a way to make it work," she said. "There may be consolidation in the sector, but it won't necessarily be driven by Brexit. There are other factors mostly down to profitability and sustainable growth."

While the UK market may be the most lucrative in Europe, N26 has a bigger opportunity across the pond that may merit more of its investment. The company launched in the US in July and reported last month that it had already reached 250,000 US customers—more than the number of British users it gained in 2 years.

N26 is no longer opening new UK accounts and will be closing existing ones on April 15.

Featured image courtesy of N26
 

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