N26 faces banking regulator order about fraudulent transactions

NelsonG · May 22, 2019

Fintech startup N26 received an order from BaFin, the German banking regulator. According to the regulator, N26 hasn’t been doing enough when it comes to money laundering and terrorist financing. The company has a specific period of time to implement changes and rectify its internal processes.

“Today, BaFin published an order for N26 Bank GmbH. An order is an instruction from them to improve processes within a certain time frame. The order requires us to optimize existing processes to prevent money laundering and increase N26 staffing levels,” the company says in a blog post.

A few articles have highlighted a handful of cases of fraud in recent weeks. Customers tried to use N26 for money-laundering purposes. It took some time before N26 reacted and closed those accounts.

It’s not that surprising given that literally every bank suffers from this issue. For instance, all the big French banks (BNP Paribas, Société Générale, Crédit Agricole and Crédit Mutuel) have been fined in the past for the same reason.

Banking regulators don’t review suspicious transactions directly. They make sure that banks have the right processes and teams to catch the vast majority of suspicious transactions.

As N26 has more than 2.5 million users, it’s been hard to scale its workforce appropriately. In other words, it has been short-staffed. In recent months, the company has been hiring customer support and anti-money laundering teams like crazy, by hiring more people directly and signing deals with subcontractors.

BaFin asks N26 to catch up with its backlog of flagged transactions. The company plans to be done by the end of next week. BaFin also wants to see written descriptions of processes and workflows. Finally, the regulator says that N26 should recheck the identity of some customers and redo the KYC process (“know your customer”). N26 says that it plans to implement BaFin’s requirements before the deadline.

Creating a startup is hard, but creating a bank with startup-like growth is even harder. Banking regulation is tough, and it’s a good thing for N26 customers that BaFin is keeping an eye out. Let’s hope that today’s order is just a bump in the road.