Why Bunq waited before taking on equity financing

There was a time when the prospect of starting a venture capital-funded bank might have been considered an act of extreme hubris. But today, we take for granted that the banking and financial services market is being reshaped by a rapidly growing group of digital-first companies. Data provider Dealroom lists 39 neobanks in the UK alone, raising a total of $8.7 billion in investment. France and Germany have 10 and 7 respectively.

And they continue to be popular with investors. Q1 figures released by HSBC Innovation Banking and Dealroom earlier this week showed British neobank Monzo boosted its overall investment total with a $340m raise, putting the fintech sector back on the UK investment rankings. It was pointed out that it was at the top of the list.

Netherlands-based Bunq, a neobank founded in 2015, is one of the banks that has benefited heavily from external investors, having raised €193 million in 2021 and recently raised another €100 million. Injected 28 million euros. But interestingly, the 2021 event was Series A. Prior to that point, founder and CEO Ali Niknam had chosen to self-fund the company. When I spoke to him last month, I wanted to know more about his plans to take a bullet after Brexit and enter the UK market, and why he held off investing until relatively late in the bank's development story.

neobank poster children

Digital-first challenger banks such as Revolut, Monzo and N26 are often considered the poster child for European fintech. It gained attention for its user-focused approach to banking, appealing to a young and often highly mobile customer base. Their customers tended to be people who were dissatisfied with the services provided by established, established companies. Like its competitors, Bunk has carved out a niche in the European banking market. In January this year, the bank announced a profit of 53.1 million euros in 2023. Behind that headline figure, the bank reported that deposits rose from €1.7 billion to €7 billion, and total interest income increased by 488%.

So while it's a successful entrepreneurial strategy, starting a bank must have seemed an incredibly risky prospect when Niknam started working on the idea in 2012. do not have. At the time, he was best known as the founder of domain name provider TransIP. Why enter the turbulent waters of financial services? After all, it wasn't necessarily because I liked banking.

“I was 29 years old and had a lot of time on my hands,” he says. “I decided to write a book, and while writing the book, I realized that what drives me is to develop products that people want to use.

In the wake of the financial services crisis, he realized there were problems with the existing banking system. “I saw some of my friends have to quit their businesses. Other friends couldn't buy a house. I said I'd start a bank.”

He wasn't the only entrepreneur, and he wasn't the only one to see the opportunity first. Germany's N26 was launched in his 2013, while the UK's Monzo and Revolut ceased operations in 2015. There was also continued growing dissatisfaction with established banks in the wake of the Great Financial Crisis, plus an emerging market of people who were ready. Try app-based providers that offer a different type of service.

Nevertheless, establishing a bank was not an easy process. In the Netherlands, anyone applying for a banking license had to demonstrate a product and provide evidence of sufficient financing for three years. All of these needed to be prepared before applying. In other words, we had to overcome financial and product development hurdles before we could launch.

Self-financing options

So why not seek external funding, both to develop the product and to arrange the necessary capital? “I had a very clear business plan,” he says. “We decided to self-fund it. We didn't want fundraising to take away from that focus.”

Niknam was unusually lucky. Although he had already started his two companies, he did not have the resources to withdraw. In his opinion, his self-funding route will allow him to focus on his own plans without relying on investors, many of whom will have their own ideas on how to set up and run the bank. was. “I tend to make decisions based on what is best for the company.” Therefore, initially he invested 44.9 million euros of his own funds.

This not only allowed us to design products without external pressure to do things differently, but we also had the freedom to start sustainability projects, such as planting trees.

But that begs the question. Back in a 2020 interview with EU Startups magazine, Niknam declared Bunku to be Europe's largest self-funded bank. That has changed. So, after six years of building a business, why would you seek outside investment in 2021?

According to Niknam, it was a matter of taking on investors at the right time. At that point, he thought the bank's culture and approach to product development was established. Decisions are less likely to go off track.

“By a certain point, we had gotten pretty big,” he says. The attitude of focusing on the user was deeply rooted. We were clear about the users and the product,” he says.

The Series A round was used to partially fund the acquisition of two companies: Tricount, an expense app provider, and Capital Flow, an Irish lender focused on small and medium-sized businesses. Most recently, the company invested in an AI-powered customer service capability known as Finn. Currently, the bank operates in his 30 countries in Europe.

Overcoming the Brexit barrier

Assuming all goes to plan, the next move will be to obtain a UK e-money license. This will allow the company to serve customers in the UK. This represents unfinished business. After leaving the EU, the UK became a third country and was no longer part of the European banking regulatory system. This essentially means that European fintech companies cannot simply 'passport' their services to the UK, giving Bunq a certain amount of time to offer the service to existing users in the UK. However, operations were suspended after the expected financial services agreement did not materialize.

But Mr Niknam said the UK remained an important market and the bank was in discussions with British regulators.

So why should UK consumers choose Bunq over incumbent banks or neobank challengers? Niknam cited multiple IBAN features that allow users to open accounts in a variety of currencies. I am. Digital nomads represent a major market.

More generally, Brexit complicates the situation for British neobanks looking to offer their services overseas and Europeans eyeing the UK market. For example, Revolut established its headquarters in Lithuania to serve European customers. In the banking sector more generally, UK banks looking to trade in Europe will need to agree an operating model with their national supervisors. Similarly, EU banks require a UK license.

Bunq, on the other hand, focuses on products. “I didn't care about money,” Niknam says. “I'm wealthy because I can do what I want, which is make products.”