Europe’s neobanks eye American wallets

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As one of Europe’s leading digital banks, Bunq hoped for quick approval when it applied for a US banking licence in 2023. One year later, the Amsterdam-based fintech firm withdrew its application due to a misalignment between US and Dutch regulators. The company is now making a second attempt, filing in April for a broker-dealer licence that will allow its US users to invest in stocks, mutual funds and ETFs. This is only the first step in an ambitious American adventure, says a Bunq spokesperson, adding that it will “start by making investing effortless and fully transparent, with no hidden fees,” possibly a jab at its US competitors and their practices. Bunq, which boasts 17 million European users, plans to reapply for a banking licence later this year.

Growth above all
Bunq is not the only European digital bank that is seeking expansion across the Atlantic. UK digital banking leaders Revolut and Monzo have also been eyeing the US market, riding a wave of renewed interest from investors following a post-pandemic funding crisis. The strategy is a no-brainer, given slower customer acquisition in Europe after a decade of manic growth and intensifying competition that compresses margins. A sense of urgency is also taking over the fintech market as it matures and fewer digital banks (also known as neobanks) are expected to become dominant globally. Some are in the black after years of losses; 2024 was Bunq’s second consecutive year of profitability.

One problem for neobanks is that they lag behind incumbents in the quintessential banking business: credit extension. Their lending operations are relatively small, meaning that revenue has to come from payment fees and premium accounts.

Regulation has also become stricter. “Europe has become increasingly hostile ground for fintechs, with tighter funding conditions and tougher regulations throttling growth,” says Carrie Osman, founder of Cruxy, a UK growth consultancy working with fintech firms. A wave of regulatory reform across the Atlantic, including the recent ‘1033 rule’ that has unlocked access to consumer financial data, has put the US on their radar, she adds. “The upside is that because they operate under more stringent regulations and thinner margins in Europe, they are better placed to innovate in transparency, cost efficiency and cross-border functionality,” argues Alessandro Hatami, former chief operating officer of digital banking at Lloyds Banking Group and author of Inclusive Finance: How Fintech and Innovation Can Transform Financial Inclusion.

A regulatory minefield
Despite these reforms, navigating the country’s Byzantine regulatory landscape remains an obstacle to conquering the $24trn US market. Obtaining a banking licence requires approval from state and federal regulators, while state-by-state money transmission licences are necessary to operate in several states. On top of a banking charter, aspiring lenders need to secure deposit insurance and proof of sufficient funds. Rising US protectionism adds an extra barrier, says Hatami: “Current instability in engagement with foreign providers is possibly making the rollout of a European fintech in the US problematic.”

Previous attempts faltered due to underestimating the complexity of US regulation

Dealing with US payment infrastructure can also be tricky. In Europe, neobanks benefit from interbank payment systems that enable customers to make transactions seamlessly, whereas US banks have been slower in adopting similar technologies. European entrants who view the US as a single market have struggled, says Dave Glaser, CEO of Dwolla, a US payment service provider, whereas opportunities exist for those who recognise that modernising their payment infrastructure involves adapting to America’s complex financial backbone.

Past attempts to crack the US market have proved traumatic. Monzo withdrew its banking licence application in 2021 when regulators warned that approval was unlikely. Berlin-based neobank N26 closed down its US operations in 2021, having failed to offer there its profit-making membership deals. Revolut’s delay in obtaining a UK banking licence made a US application practically impossible.

Without a banking licence, digital banks are unable to generate revenue through credit products. “Previous attempts faltered due to underestimating the complexity of US regulation, overestimating brand pull and launching without a compelling local value proposition,” says David Donovan, head of financial services North America at digital transformation consultancy Publicis Sapient.

For fintechs unable to obtain their own banking charter, partnering with a US bank is a no-brainer. Monzo has partnered with Sutton Bank to hold users’ deposits. Cleo AI, a UK fintech which offers personalised financial assistance through a chatbot, has partnered with Thread Bank and WebBank and boasts seven million customers in North America. The downside is that partners retain a share of card transaction fees, a major revenue source since they are significantly higher in the US. “It eats into your margins; you have less autonomy around product decisions; and you are often tied to the maturity of the partner bank’s risk and compliance processes, which can feel very outdated,” argues Stephen Greer, banking industry consultant at analytics platform SAS, adding: “This means the entry point to the US market is building services on top of a simple demand deposit account, which is a very low-margin product and typically doesn’t outpace your cost to acquire new customers.”

The recent collapse of Evolve Bank, triggered by its partner Synapse’s mismanagement of customer funds, has also intensified regulatory scrutiny of such partnerships. More ambitious neobanks have decided that going it alone is a bet worth taking. Revolut offers its card through its partner Lead Bank, but also has a US broker licence and is now seeking its own banking licence.

“The best strategy for a European fintech is to create a US entity and nurture this by tapping into the US investor markets, from venture capital all the way to IPO. And to play down its European roots as far as possible,” says Hatami.

Fierce competition
US retail banking is a competitive market, with over 3,000 institutions including regional banks, savings banks and credit unions, meaning that European fintechs must be prepared for slower growth and higher customer acquisition costs. US fintechs like Venmo, SoFi, Zelle and Chime have massive marketing budgets. “Word of mouth and referrals can only get you so far in the US,” says Dylan Lerner, a digital banking analyst at Javelin Strategy & Research, a US market intelligence provider. “You might have to spend some serious money to establish yourself – from heavy spending on advertising to naming rights on stadiums and sports sponsorships.”

The flipside is that new entrants can focus on niche markets that are large enough to be profitable. European neobanks can offer one-stop banking solutions to customers hungry for digital-first experiences with fancy add-ons on top of savings accounts, such as investing tools and real-time spending analytics. “Many US fintechs are built on banking-as-a-service models that limit control and innovation. European firms, having built more of their stack, can differentiate on both cost and customisation,” says Donovan.

Remittances is one potential revenue stream, notably offering cross-border and multicurrency services to around 20 million US-based immigrants. A case in point is the success of Wise, a platform that “addresses international money movement with a clarity and fee structure that is still uncommon in the US,” Hatami says. Bunq is also targeting digital nomads, “especially the nearly five million European expats who struggle with banking bureaucracy while pursuing a location-independent lifestyle,” according to the firm’s spokesperson.

Most companies want to list on Nasdaq or NYSE, raise a tonne of money and cash out

Cultural differences also come into play. American customers are more credit-focused than Europeans and are constantly offered customer rewards and loyalty deals, meaning that new entrants must provide expensive perks to lure them. Their loyalty to traditional banks is also rock-solid. “Americans are largely satisfied with their financial institutions. They are not eager to switch banking relationships,” says Lerner from Javelin Strategy & Research.

A recent survey by the firm found that 77 percent of consumers were unlikely to switch away from their primary financial institution. Foreign neobanks focused on business-to-customers solutions face an uphill battle due to relatively high customer acquisition costs, argues Kevin Fox, chief revenue officer at Thredd, a UK payments processor that recently expanded into the US and has helped several neobanks scale internationally. “Without a pivot to some differentiated credit product, prepaid and debit offerings often don’t generate enough revenue to warrant those costs,” Fox notes, adding that fintechs moving to a business-to-business model by providing solutions to SMEs, such as expense management services, have a better chance of US success.

Surprisingly enough, the biggest opportunity for European fintechs may be disrupting the technological backwardness of the US banking system. Perhaps the starkest example is the persistence of cheques, still widely used by banks and corporations, in a digital era. “What they [European neobanks] bring is primarily tech: fast onboarding, seamless user experience, a fully digital experience. That is not something the US banking system excels at yet,” says Arthur Azizov, founder of fintech alliance B2 Ventures.

Going public
For European fintechs, the biggest prize that comes along with US presence is the possibility of a public listing. US IPOs typically achieve higher valuations and provide access to the world’s biggest investment pool. Revolut and Monzo are expected to go public by the end of the decade, and their leadership has indicated preference for a US listing. Such decisions, however, have a political dimension that can cause friction at home. “Revolut was recently granted a banking licence – probably in part because of a promise to list in London, not in the US. Most companies want to list on Nasdaq or NYSE, raise a tonne of money and cash out. But governments want to keep their unicorns close to home,” says Azizov, adding: “For a serious US expansion, they will need to go all in: full teams, full infrastructure, full commitment. They may even need to move their HQ.” For sceptics though, going public might be a premature step without a clear US-orientated strategy and profitability model – the latter being the holy grail that will seal their position in the banking world.

“The real endgame is profitability at scale. This is something that has eluded most fintechs, regardless of listing venue,” says Donovan from Publicis Sapient. “It would prove that a digital-native, product-led model can work even in the world’s most competitive and entrenched banking market.”