Why Bunq Waited Before Taking On Equity Finance

There was a time when the prospect of launching a VC-funded bank might have been regarded as an act of extreme hubris. Today, however, we take it for granted that the banking and financial services market has been reshaped by a burgeoning group of digital-first players. Data provider Dealroom lists 39 neo-banks – which collectively have raised $8.7 billion in investment – in the U.K. alone. In France and Germany, there are 10 and 7 respectively.

And they continue to be popular with investors. Earlier this week, quarter-one figures released by HSBC Innovation Banking and Dealroom noted that the fintech sector was again topping the investment rankings in the UK, with British neo-bank Monzo inflating the overall total through a $340 million raise.

Netherlands-based Bunq – a neo-bank launched in 2015 – is among those to have benefited from the largesse of external investors, having raised €193 million in 2021 and more recently, a further injection of €128 million. Interestingly, though, the 2021 event was a 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 was keen to learn more about his plans to bite the post-Brexit bullet and enter the U.K. market and his reasons for eschewing investment until relatively late in the bank’s development story.

Neo Bank Poster Children

Digital-first challenger banks, such as Revolut, Monzo and N26 are often seen as the poster children for European fintech. With a user-focused approach to banking, they gained traction by appealing to a young – and often very mobile – customer base. Their customers tended to be people who were frustrated by the service offered by long-established incumbents. In common with its competitors, Bunq has carved out a niche in the European banking market. In January of this year, it announced a profit of €53.1 million for 2023. Underlying that headline figure, the bank reported a rise in deposits from €1.7 billion to €7 billion and a 488% rise in gross interest income.

So, it’s an entrepreneurial play that has paid off, but starting a bank must have seemed like an incredibly risky prospect back in 2012 when Niknam began working on the idea. At that time he was best known as the founder of domain name provider TransIP. Why make the move into the choppy waters of financial services? As it turns out, it wasn’t necessarily a love of banking.

“I was 29 and I had a lot of time on my hands,” he says. “I decided to write a book – and when writing that book, I realized that what drives me is developing a product that people want to use.

In the wake of the financial services crisis, he saw problems in the existing banking system. “I saw that some of my friends had to stop running their businesses. Other friends were unable to buy houses. I said, you know what, I’ll start a bank.”

He wasn’t the only entrepreneur or even the first to see that opportunity. Germany’s N26 launched in 2013 and the UK Monzo and Revolut would pull up their shutters in 2015. There was also a continuing rumble of dissatisfaction with incumbent banks in the wake of the Great Financial Crisis, plus an emerging market comprised of people who were prepared to try out app-based providers who offered a different kind of service.

Nevertheless, launching a bank wasn’t an easy process.. In the Netherlands, anyone applying for a banking license had to demonstrate the product and provide evidence of sufficient finance for three years. All this had to be in place before the application. In other words, there were financial and product development hurdles to jump before a service could be launched.

The Self-funding Option

So why not seek external finance, both to develop the product and put the necessary funding in place? “I had a very clear business plan,” he says. “I decided to self-fund. I didn’t want fundraising to distract from that focus.”

Niknam was unusually fortunate. He had resources having already launched – but not exited – two companies. As he saw it, the self-funding route would allow him to focus on his plans without recourse to investors, many of whom would have their own ideas about how to start and run a bank. “ I tend to base decisions on what is best for the company.” Initially, therefore, he invested €44.9 million of his money.

So there was a freedom to not only design products without outside pressure to do things differently but also to initiate sustainability projects such as tree planting.

But that raises a question. Back in a 2020 interview with EU Startups magazine, Niknam declared Bunq to be Europe’s largest self-funded bank. That has changed. So, after building the business for six years, why seek external investment in 2021?

It was, Niknam says, a question of taking on investors at the right time. At that point, he considered that the culture of the bank and its approach to product development had become established. The decision-making was less likely to be blown off course.

“By a certain point, we had become quite big,” he says. The laser focus on users had become ingrained. We had clarity on the users and clarity on the product,” he says.

The Series A round was used in part to fund two acquisitions – namely expenses app provider, Tricount and Capital Flow, an Irish lender focusing on small and medium-sized businesses. More recently, the company has invested in an AI-driven customer service function known as Finn. Today, the bank operates across 30 countries in Europe.

Getting Past the Brexit Barriers

Assuming everything goes according to plan – the acquisition of a U.K. eMoney license will be the next move. This, he says, will enable the company to offer services to British customers. This represents unfinished business. Post-Brexit, Britain became a third country and no longer integrated into Europe’s banking regulation system. Essentially, this meant that European fintechs could not simply “passport” their services into the U.K. Bunq was given a certain amount of time to serve existing U.K. users but when an expected financial services agreement didn’t materialise, operations were suspended.

However, Niknam says the UK remains an important market and the bank is in talks with the U.K. regulator.

So why should British consumers opt for Bunq rather than an incumbent bank or a neobank challenger? Niknam cites the facility of multiple IBANs, allowing users to open accounts in a range of currencies. Digital nomads represent a key market.

More generally, Britain’s withdrawal from the E.U. has complicated the picture for British neo-banks seeking to offer services abroad and Europeans eyeing the British market. For instance, Revolut has established an HQ in Lithuania to service European customers. In the banking sector more generally, UK banks seeking to trade in Europe must agree an operational model with a national supervisor. Similarly, EU banks need a British licence.

Meanwhile, for Bunq, the focus is on product. “I couldn’t care less about money,” says Niknam. “I am rich because I get to do what I like to do – which is create products.”