Why N26 Wants to Be a NeoBroker, Why Neobrokers Are HOT And Maybe In Danger
- Jörn Menninger
- Dec 22, 2021
- 8 min read
Updated: Mar 26
Explore why N26 is entering the booming neobroker market and how regulators might impact this high-margin business model.
What Is This About?
An analysis of why N26 is entering the booming neobroker market and the regulatory risks that could impact this high-margin business model. This article explores the neobroker trend in Germany, competitive dynamics with players like Trade Republic, and how regulators may reshape the landscape.
Introduction
N26's push into neobroking and the broader neobroker boom raise important questions about market regulation and sustainability. This analysis examines why N26 wants to become a neobroker, why the business model is generating so much investor excitement, and the regulatory risks that could disrupt the entire sector.
Executive Summary
N26's push into neobroking and the broader neobroker boom raise questions about market sustainability and regulatory risk. The high-margin business model attracts intense investor interest alongside growing regulatory scrutiny.
Explore why N26 is entering the booming neobroker market and how regulators might impact this high-margin business model. Startuprad.io brings you independent coverage of the key developments shaping the startup and venture capital landscape across Germany, Austria, and Switzerland.
This article is part of our coverage of Regulatory and Policy Updates Affecting Startups in Germany,.
Why Pay for Order Flow?
The idea is simple. Stock exchanges earn money on each trade they are making.
Either in the bid-ask spread (or their market makers) or in the clearing and settlement (Deutsche Börse for example owns Clearstream). Also, the larger any order is, the more it could impact the price of a traded security on a venue where there is not a lot of trading in the respective security. So large orders are usually executed were the most liquid market (meaning most stock traded) is, most of the time split in several smaller orders spread over time. There are also other considerations for professional traders, besides all the regulations and internal guidelines, known as market microstructure. We can not go into detail here but have a look here.
Therefore trading venues have several incentives to show a lot of trades in as many stocks as possible (yes, there is of course a specialization) and sometimes it makes even sense to pay for some of the trades, meaning routing the order flow to your stock exchange or MTF.
Note that payment for order flow is not new. Non-neobroker are charging you for the execution of our order and also can get paid to route your order to a certain venue. Actually, it is a practice pioneered by Bernhard Madoff. Take an example from Lendacademy how this makes sense here:
“For example, today the same system would connect someone selling Gamestop for $50, and someone buying GME for $50.01. Madoff sells it for $50.01, but gives the seller just $50, taking $.01. That cent is then split between paying the exchange that sent in the trade, paying Madoff, and ensures the retail customer had free trade or price improvement.
Seems like, well, pennies on the dollar, who cares? But multiplied by 100 shares, that’s $.50 for the market maker, $.50 for the exchange. What about by a million? Or a billion? Madoff and his contemporaries made hundreds of millions. …”
For example for option trades in the US payment for order flow is the norm, since a single stock could have thousands of possible puts, calls, strikes, and expiration dates. Learn more here.
Payment for order flow generates low reveneues for one trade, but they have a large scalability
Why Neobrokers are HOT — A Unicorn Creation Machine
Neobrokers are not only trendy, they are really generating revenues. They may not all be profitable yet, but the margins they are making are in some cases close to 80%. This means they make 80 cents out of each Euro in revenue. Let us look at two examples. To look in the neobrokers we have to rely on numbers from BitPanda and Trade Republic. They are required — under certain circumstances — to publish their balance sheet and their P&L by local laws in Austria and Germany. So let's have a look:
Trade Republic grew by 3.600% in 12 months ending Sepember 2020
The P&L of Trade Republic for example shows their largest source of income are commissions of 26,8 mn Euros (October 2019 — September 2020). Note that they are not yet profitable, but generating 100 € revenue per client, where it costs them only 40 Euros to acquire them (Customer Acquisition Costs), plus they are growing by more than 3.600% YoY. So, we are looking at a business growing by more than 3.500% making 60 Euros with each client in the first year. For some time in 2021 this made Trade Republic Germany’s most valuable fintech, until N26 disclosed their newest fundraising. You can learn more about Trade Republic here:
So, this is why Trade Republic is hot, but let us have a look at the crypto trading unicorn BitPanda, providing very similar services with origins in crypto trading.
BitPanda had in 2020 a 22% Profit Margin during Build Up and Expansion
Also, BitPanda did quite well. They focus more on crypto trading than on stock trading. With 55 mn Euros revenue, they made 12 mn in profits, which is a 22% profit margin. One should keep in mind that these are numbers from the past, in crypto, there are much larger margins possible: coinbase for example even made in H1 2021 a 63% revenue margin. Robinhood — a US example for all neobrokers — now generated 51% of its revenues from Crypto trading. BitPanda obviously realized their opportunity and the need to scale fast. They did two fundraisings in 2021, each time claiming the title of Austria’s most valuable startup and most valuable fintech. First, they raise 170 mn US$ in March at a 1.2 bn US$ valuation, then they raised an additional 263 mn US$ on a 4.1 bn US$ valuation.
Both of them are not alone in the space. Some established players are already active to mention a few here, we have Flatex, Consors Bank (owned by BNP Paribas), onvista Bank (owned by Société Générale), ING (in asset management formerly a partner of Scalable Capital. Scalableo is now also working towards a neobroker business model), comdirect (a subsidiary of Commerzbank) and S-Broker (online broker of Germany’s thrift organizations).
Many Players Are Already Active as Online Brokers in Germany including Deutsche Bank, Commerzbank, BNP Paribas, ING and Societe Generale
Also, other startups are gearing up: Scalable Capital from above started out as a robo advisor, but is increasingly active as neobroker and asset manager. Scalable raised 150 mn Euros on a 1.4 bn US$ valuation in June 2021 and N26 — freshly funded with 900 mn US$ at a 9 bn US$ valuation — is going to join the neobrokers in January 2022 with new offerings including crypto and equities. Coinbase is already active in Germany and there is no question of whether more international players will be entering the market. The question is how many?
You can learn more about many of the startups mentioned above in our startup new or our unicorn tracker. For example here:
N26’s Play in All of This
It all started out with the aforementioned fundraising. N26 raised 900 mn US$ in a Series E funding, at a 9 bn US$ valuation. This was quite surprising since the neobank has been in trouble for some time with the German Finance Oversight BaFin. We have been tracking the story for you. You can read more about the story here:
It just recently became known that N26 — having already raised 900 mn US$ made a second closing to their Series E funding. You can learn more here:
Bottom line is that in the opinion of BaFin N26 did not do enough in their risk management, e.g. to fight money laundering and scams. So BaFin made an unpreceded step for challenger banks, they limited the new business N26 can generate. The maximum was set to 50.000 new customers per month. As a first reaction N26 promoted Thomas Grosse to the position of risk manager. Interestingly he has also been a guest in our podcast, so you can learn more about him in our interview with him — in his last position at Google.
So N26 had to find a way out. They made two obvious steps:
They focused on Europe, leaving the US pretty soon after the fundraising. They announced their Europe First strategy in November and the last day their clients in the US can use their app is January 11th, 2022. https://n26.com/en-us/blog/n26-us-operations They entered the US in July 2019 — but what one could gather from news reports — never really got a grip on the market. N26 had also some problems in terms of HR in the US. For more than a year the company was looking for a CEO for their US business and could not find one.
N26 had to focus on a source of revenue, promising higher margins with fewer clients — since the growth is limited. This led them (or encouraged them) to make the decision to offer online brokerage from January 2022 on. They have been already thinking of offering equity trading in January 2021 but also decided to add Crypto to their new offer in Spring 2021 (article form June). This likely played a big role in their recent fundraising and valuation. Not only the potential margins but also the idea of converting existing clients into brokerage clients, with small or no CAC.
Given all this information N26 is expected to bring a super app, having all the N26 options and NeoBroker features. They, therefore, teamed up with a developer in Belgrade, Serbia where they have a development team of around 40 people already working on the equities and crypto trading feature for some time.
The Other Neobrokers Are Not Asleep
In our December News, we covered Scalable Capital’s activities. They have originally been a robo advisor but move more and more into neobroker territory:
A contender in the Neobroker Wars in Europe Scalable Capital make a move: They want to win over younger investors and lower their monthly minimum for ETF investment plans to 20€/month https://buff.ly/3EoeeCE
Another move in the neobroker competition in Germany: Scalable Capital starts their offer for Bitcoin trading https://buff.ly/32ecnCA
Not only do they offer trading and management of equities, ETFs and other securities, but they started their Bitcoin trading ahead of N26.
Also, social trading platforms like eTroro move in neobroker teritorry, websites like Onvista and Finanzen.net move in and there are already established Players like Max Blue (Deutsche Bank), comdirect (Commerzbank) or ING.
Regulators Spoiling the Party?
In the most recent developments, US and European regulators are considering limiting Payment For Orderflow. This would be damaging to the current business model of the neobrokers, but nothing to be implemented overnight. One can assume years of deliberation and implementation in the US and EU before the regulation comes into force. This leaves time for the startups to adapt.
We keep you up to date.
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📊 For the latest updates on billion-dollar startups across Germany, Austria, and Switzerland — including sector insights, valuation shifts, and exclusive founder interviews — explore our DACH Unicorn Index. It’s the definitive resource for tracking unicorns in the DACH startup ecosystem. Our Sources: The debate over payment for order flow in the US (via Bloomberg Intelligence: https://www.bloomberg.com/professional/blog/equal-or-fair-debate-heating-up-on-payment-for-order-flow-ban/) Bloomberg reports EU Plans https://www.bloomberg.com/news/articles/2021-11-09/eu-set-to-ban-trading-practice-helping-power-meme-stock-mania SEC Study from 2000 on the topic https://www.sec.gov/news/studies/ordpay.htm https://en.wikipedia.org/wiki/Payment_for_order_flow https://financefwd.com/de/bitpanda-zahlen-2020/ https://finanz-szene.de/fintech/3600-wachstum-wir-haben-die-trade-republic-zahlen/ https://techcrunch.com/2021/10/18/challenger-bank-n26-raises-900-million-at-9-billion-valuation/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAALcJ3qv5I3wOuiFpJHNt2g-gJpoF94pvEEN0T2Z2tTC9Uh-AQncNko94yDeYAoo9rbE73LBX9JkHmG-f8bJqm-MsJ0pPUzf7depeebGEWa_GM4LN9M5FLbBoirnf4R9bGo1T36G4cqAlq6Z_Fl14OzW5MzGziQFmxBdevF7APzhc https://www.handelsblatt.com/finanzen/banken-versicherungen/banken/neobroker-trade-republic-wehrt-sich-gegen-kritik-an-gebuehrenmodell/27803718.html https://www.wiwo.de/finanzen/boerse/payment-for-order-flow-was-neo-brokern-jetzt-droht/27790340.html https://www.tagesschau.de/wirtschaft/unternehmen/n26-bafin-auflagen-101.html https://www.forbes.com/sites/ronshevlin/2021/11/23/n26s-us-failure-a-lesson-for-all-challenger-banks-not-just-those-from-europe/ Key Takeaways “For example, today the same system would connect someone selling Gamestop for $50, and someone buying GME for $50.01. This article covers a significant development in the DACH startup and venture capital ecosystem. The DACH region (Germany, Austria, Switzerland) continues to be one of Europe's most dynamic startup markets. Atomic Answer
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