N26 vs Revolut
The battleground for neobanks is heating up
Neobanks are booming today due to high consumer demand for more accessible and more efficient ways to manage money. Neobanks are digital-only banks with no physical branches. This business model allows companies to offer personal finance management features, low rates, and superior user experiences. Higher profitabilities and attention from consumers pushing further the trend for digital-only banking services.
For investors, this trend is a great opportunity to accumulate wealth from a long-term perspective. However, most neobanks are private and are not traded on FTSE or Nasdaq. Investment in private companies requires a lot of capital and are hardly available for retail investors. But with a help of blockchain technology, the barrier to entry has lowered dramatically and private equity becomes more affordable. So to benefit from growing fintech unicorns, it is first vital to conduct a market and competitive analysis.
Neobank industry
According to GrandViewResearch, the global neobank market was valued at $35 billion in 2020 and is expected to reach $722 billion by 2028. The market is estimated to grow at a compound annual growth rate (CAGR) of 47%.
In 2020 alone, the largest eight neobanks from Europe and the US earned more than $3.6 billion in revenue. While the European region dominated the neobanking market in 2020 and accounted for over 30.0% share of global revenues.
The largest players in the market are American Chime and SoFi, challenger banks from Great Britain: Revolut, Monzo, Starling and European N26. The world largest neobank with the biggest client base is the Brazilian NuBank with 34 million users.
Neobanks are now focusing on serving corporate clients. They accounted for more than half of new users among European neobanks, according to GrandViewResearch. Neobanks offer businesses solutions with advanced interfaces and valuable information for services such as accounts payable and receivable, payments, and bank statements.
Competitive analysis
Considering that US and Brazilian banks are only available in their home countries the most international neobanks are Revolut and N26. Both companies are present in 25+ countries worldwide and recently entered the US market as well. Therefore the in-depth competitive analysis will be conducted only for the most famous challenger bank from the UK and the biggest neobank of Europe.
N26
N26 is a leading European neobank that operates under the BaFin license. This year the number of the bank’s users exceeded 7 million. In 2020 alone, 2 million new users were connected to the service. In May 2020, the company expanded its funding for round D by an additional $100 million, bringing the current round to $570 million. The lead investors were Allianz X, Peter Thiel and Tencent.
Currently N26 is valued at $8 billion on a secondary market
Attracted capital was used by the company to launch the service in the United States where the number of users has already reached 500,000. On top of that in January 2021, N26 received a license to operate in Brazil, one of the biggest markets for neobanks.
According to research by Forbes and Statista, N26 was selected as the best international bank in 2021.
Revolut
The startup was launched in the UK offering money transfer and exchange services. Today, it has added several innovative products like the open banking system, gold futures and cryptocurrencies wallet including Bitcoin and Ethereum. In 2020 Revolut decided to expand on the US market. Now the company operates in 37 countries, with more than 15 million accounts opened.
The last funding round made Revolut the second largest fintech startup in Europe with a $35 billion valuation (1st — Klarna). Today, Revolut shares are trading on the private equity secondary market at $24 billion, which makes it one of the hottest PE investments.
Metrics
All data is from open sources and may not be the most up-to-date. However, that is the biggest pitfall in private equity investments, that companies are not obliged to report on their financials and performance.
A competitive analysis of companies is based on the available data: current estimates in the secondary market, number of customers, transaction volume for 2020, average deposit amount in 2021, and number of site visitors for April 2021.
Comparative analysis indicates that N26 is undervalued relative to Revolut by approximately 88%. Revolut has a valuation twice as large, but the volume of Revolut transactions for 2020 exceeds the volume of N26 transactions by only 15%. The difference in website visitors is even less significant.
The current metric does not undervalue N26, but most likely overvalue Revolut current price. However, the secondary market speaks for itself, and investors seek such companies in a most severe way. What makes a lot of room to grow for N26. At least 70% to become even with Revolut by all major metrics plus 47% CAGR increase, makes N26 an extremely attractive investment.
Risks
As in any other investment, there are related risks. First of all, without any physical branches and the highest competition, neobanks can charge the lowest or even zero interest rates. This translates into a low business margin, meaning that finding profitable products can take a long time. Moreover, there is additional competition from traditional banks that enter the space of digital banking.
The next big risk is international regulation. For example, the UK branch of N26 had to be closed due to complications after Brexit, which led to a loss of about $26 million for a company. International regulation in the financial sector could negatively affect the development of the industry.
Nevertheless, both Revolut and N26 are backed by the biggest venture funds and investment houses. The need for digital-only banking is increasing worldwide, meaning the demand for such service will only push the industry for further development. For private equity investors, that means only one thing — a high return on investments.
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