When N26 was launched as a challenger bank in 2015, the Berlin-based bank set out to revolutionise the conventional banking experience. Customers should be able to handle all banking matters on their smartphone.
However, how can a young start-up establish a bank if the journey to obtaining a banking license and the technical infrastructure required is both long and costly?
- Investments: Newcomers in the banking business such as N26 would have to invest from the outset in a technical infrastructure that has continued to develop over many years in conventional banks.
- Banking license: Anyone who opens accounts, executes transactions and manages funds on behalf of clients is subject to German and European banking supervision and must have a banking license.
- Registration: The registration process is carried out by BaFin. It is not unusual for this to take a year and the costs are difficult to estimate at the beginning of the process.
- Compliance: After successfully receiving a license, banks are subject to German and European banking supervision and must satisfy high compliance requirements.
All in all, these are considerable challenges for providers whose core competence is not banking per se, but rather the development of new apps and digital banking services.
For N26, the solution was white label banking and the establishment of a partnership with Munich-based Wirecard Bank. As a white label bank in the background, Wirecard set up accounts, provided classic account functions and processed all transactions on behalf of the account holder registered with N26.
The partnership with Wirecard Bank is now a thing of the past. N26 now acquires 2,000 new customers daily. For N26, banking is both a core business and a well-functioning business model. It was only a matter of time before the challenger bank from Berlin would apply for its own banking license. After a successful start-up phase, it managed to acquire the license in 2016.
What Is White Label Banking?
In order to implement promising business models in the banking sector, FinTechs such as N26 and other newcomers that want to offer banking products generally require a banking license. However, very few FinTech start-ups can afford their own banking license, mainly due to time constraints. As has already been mentioned, receiving this license from BaFin is a lengthy process that demands a great deal of patience.
FinTechs that want to go to market with a new app or a new online service usually pursue short-term goals. They develop a product that is not yet perfect, but that has the necessary market maturity to succeed. They aim for a speedy product launch, which means there is a lack of time, resources and know-how for a complex licensing process, the outcome of which is uncertain.
This is where white label banking and License as a Service models (LaaS) come into play. The white label principle is a proven concept in many areas. Specialised providers who develop special software, for example, make this available to other providers for marketing under their own brand name. Both sides reap the benefits of economies of scale:
- The actual developer of the original product exploits new sales potential and can partially compensate development and operating costs.
- The marketer can concentrate on their core business and save themselves capital-binding investments in developing a product. They can then use this to pay a user fee and thus avoid large start-up costs and time delays.
The same idea is behind white label banking and LaaS models. Providers such as solarisBank and Wirecard have their own banking license and support their customers with banking know-how, operational management and technical infrastructure.
The provider solarisBank (disclaimer: solarisBank is a FinTecSystems customer), which specialises entirely in white label banking, ventured onto the market for the first time in 2016 – an exciting business model from the perspective of financial investors. The Berlin-based start-up has a total funding amount of more than 95 million euros.
From a Bank in the Background to a Tech Provider
With white label banking, solarisBank takes up a business model that has been practiced in a rudimentary form for some time in the banking world. Financial institutions such as the Hamburg-based Sutor Bank concentrated on their own banking competencies at an early stage, while intermediaries took care of sales.
Specialised banks such as Sutor decided to split the value chain in the early 2000s and concentrated primarily on issues of infrastructure and process management as a bank in the background, while marketers took over customer service. Today, however, the market situation is completely different: PSD2 paves the way for both the opening and the digitalisation of the financial market.
Numerous providers that are not actually banks are cementing their place in the market with innovative apps and digital services. Around 300 FinTechs are active in Germany alone. This year, total investments in FinTechs worldwide will exceed the 30 billion euro threshold. Even online retailers such as Zalando are working on their own payment solutions to provide a better customer experience.
White label banks such as solarisBank that focus both on developing a technology-driven banking platform and complying with regulatory and legal requirements are ideal partners for all providers that want to gain a foothold in the financial sector but whose core business is not intended to be banking.
White label banking is therefore not only an efficient driver of growth for FinTech start-ups; it is also an exciting business model given the context of the increasingly open banking world.
The EU PSD2 directive regulates the opening of the banking and financial world to third parties. Using banking APIs, financial institutions must provide account information to other providers at the request of their customers. This has created a new dynamic in the market that will change the banking market in the long term. You can read more about this in our blog post.