Number26

With $50mm+ of funding, will Number26 develop a sustainable business model?

Background

Valentin Stalf founded Number26 in 2013 with fellow Austrian Maximilian Tayenthal. Originally, the pair started as Papayer, a credit card for teenagers. With their first significant funding secured in 2014, the young business school graduate (Stalf) and his older friend (Tayenthal) pivoted toward an offering for young adults with Number26. They first launched the Number26 product in 1Q 2015 after their move from Vienna to Berlin.

Like many mobile-only banks, Number26 does not have a banking license of its own. It has partnered with Wirecard, just as Mondo has done in the UK. Its partnership with Wirecard is part of the core strategy of Number26: avoid any distractions from building a design-led user experience.

Branding and marketing

As Stalf has explained, the name Number26 is based upon the 26 exterior cubes which form a standard Rubik’s cube. Stalf and Tayenthal believe that success in fintech is like solving a Rubik’s cube. Without understanding the algorithms used to solve the puzzle, attempts to play the game will end in frustration and failure. However, if the algorithms are known, solving the puzzle is straightforward. The founders believe they know those algorithms.

The target demographic for Number26 is young people who are “digital natives”. Based upon their current product offering, young customers who travel outside the Eurozone, transfer money to friends, and need an overdraft are ideal. Number26 appears to be spending most of its war-chest capital on staff, rather than on expensive marketing. The word-of-mouth effect, together with their significant press coverage and event presence is working well. They have grown from 20,000 accounts in July 2015, aaccelerating to 80,000 accounts by December 2015, and continuing with healthy growth to 160,000 in July 2016.

They have nearly 12,000 Twitter followers, which they acquired since launching on Twitter in March 2014, a few months after Stalf and Tayenthal started the company. Their Facebook page has c. 31,000 likes, and just over a 4,000 people follow Number26 on LinkedIn. They also have some big fans on Youtube.

Customer experience

Number26 offers its customers a Germany-based bank account, together with a Maestro Card and MasterCard. Activation and most other card functionality is controlled via the Android or iOS app. Money can be transferred to the account via wire transfer. Cash can be deposited on the card via Cash26, a partnership with Barzahlen. Barzahlen allows customers to use more than 6,000 retail locations in Germany for cash deposits or withdrawals.

The apps offer well-designed interfaces, and both are rated at 4.5 stars on their respective app stores, with more than 6,500 ratings across the two platforms. A small percentage of users do report buggy experiences with their apps, and feedback on the customer service team varies, but is generally positive.

Digital and innovation

As a mobile-only bank, Number26 is committed to digital. It offers apps for both iOS and Android. It uses Java with Spring and Hibernate as its core backend stack. It also uses PHP via Wordpress for some of its web properties.

Stalf and Tayenthal are clear that Number26 is driven by design and UX. They are also clear they do not want to be lumbered with massive back-end infrastructure like the incumbent banks. Their vision of the firm is to be a gateway platform. The gateway offers customers access to other financial products like savings, investment, and insurance via strategic partners. In short, they expect to continue their IT strategy of great front-end design, with basic API integration.

Although personalisation and recommendation is on the founders’ agenda, that development is nascent. Number26 has one Data Scientist on staff and is looking to add just one more. However, if they become the gateway platform to which they aspire, they can integrate third party behavioural analytics. They already use Google, Twitter and other off-the-shelf analytical solutions for their web offerings. In this context, solid, scalable infrastructure with Spartan workhorse code makes sense. The development and maintainenance of that technical infrastructure is led by CTO Christian Rebernik, and DevOps lead Alberto Massidda.

Financial Performance

Number26 had humble beginnings. According to the German Company Register, the company had c. €120k of capital at December 2013. Increasing to c. €800k at December 2014. However, Number26 is well capitalised today following its $40mm funding in June 2016, topping up the €10mm raised in April 2015. Notable amongst the investors is Peter Thiel via Valar Ventures.

Number26 is also spending its capital. As of June 2016 it has 150 staff, and was looking to fill another 43 positions, 15 of which were in their development teams. The company has also moved office several times, now based at 62 Klosterstraße, in the heart of the convenient and buzzing Mitte neighbourhood of Berlin. With Berlin rents of €25-35 / m2 per month, rental costs could run up to €1mm per annum, on top of more than €10mm of annual staff costs.

Number26 has three sources of revenue. Based upon those sources, current revenues are likely small. The MasterCard and Transferwise revenue sharing are low margin opportunities, requiring big transaction volumes to add up, particularly as Transferwise is positioned as a low-cost player. Overdrafts are a challenging source of revenue given they require liquidity, managing customer expectations, and credit expertise. Traditionally overdrafts are less lucrative that secured lending.

Strategy, opportunities, and challenges

The Number26 strategy is simple. Let design lead the way. Build a great UX, and customers will follow. Perhaps taking inspiration from platforms like Twitter and Facebook, there may be an implicit belief that with customers, a revenue model will emerge.

Number26 does have the opportunity to be an Uber for European banking. Its early penetration with its target demographic is good. With its current capital, the business is well positioned to become a major financial platform for young Europeans. The prospects of selling other products to those engaged customers are bright.

The primary challenges for Number26 are revenue and profitability. Account cancellations in June highlight the potential for current account customers to be loss-making customers. Incumbent banks have faced that reality for decades. Given Tayenthal’s background in finance, that reality should have been well-known to Number26 from the outset. As outlined above, achieving sufficient revenues to reach profitability with the current operating model will require ingenuity.

Summary

Number26 is executing well on its stated strategy. Like other mobile-first banking service providers, it may need to adopt some of the business principles of the incumbents which it challenges in order to build sustainable profits.

Notes:

  1. Tayenthal has a background in law and accounting.
  2. The iOS app is available in English, French, German, Italian, and Spanish. Version 2.7.2 of the iOS app was released 23 June 2016, weighing in at 75.1MB version and requiring iOS 8.0+. As of 7 July 2016.
  3. Version 2.7.1 of the the Android app was released 5 July 2016, requiring Android 4.3+ and c. 44MB. As of 7 July 2016.
  4. Java development is lead by Gianluigi Davassi.
  5. Rebernik joined in August 2015, following his experience at BWIN. Bwin Party in the UK merged with GVC in 2015.
  6. Massidda previously worked at Translated.
  7. Recent revenue figures not available publicly. December 2014 is the last date for which information is available via the German Company Register
  8. Number26 has downplayed the role of liquidity in modern banking. They have faced issues in managing customer expectations with ATM withdrawals, which are less contentious than overdraft fees. Number26 has a design-driven culture rather than a credit quality driven culture, which will require some adjustments toward the models of the incumbents which they challenge.
  9. The account cancellations caused a meaningful customer uproar, just weeks before closing the $40mm funding round. Although the company subsequently released a more comprehensive statement, its initial public relations management was rather poor. Closing hundreds of customer accounts without explanation was not ideal. Dismissing those customers as insignificant in the context of a user-base of 160,000 was also not ideal. Doubtless, however, the management and PR teams learned some valuable lessons.