• Raman Korneu, CEO and co-founder at myTU


• 29.01.2025 03:45 pm
#Neobanking #TransAtlanticBanking

European neobanks have long been drawn to the US market, seeing it as a lucrative expansion opportunity, and the inverse is also true. Yet few have made the leap to become fully established overseas.  

From Europe, high-profile stumbles in the last few years have included Berlin-headquartered N26 exiting the US, British digital bank Monzo and the Netherlands’ Bung withdrawing their US banking applications, and Revolut’s hesitancy in applying for a license. 

It’s not just European fintechs unable to crack the US, either. Investment app Robinhood had to shut down attempts to launch in the UK before it managed to set up in Europe in 2023, but only for cryptocurrency trading. 

These struggles highlight several challenges, including regulatory complexities, differing revenue models, and competitive pressures. Yet overseas expansion still offers significant opportunities for neobanks and other fintechs. Could alternative approaches, such as banking-as-a-service (BaaS), offer different routes on this path?

From hyper to sustainable growth

First of all, neobanks are becoming more cautious about expanding into new markets in general. The focus used to be on hypergrowth, but the funding that helped create 39 fintech unicorns in 2018 into 272 in 2023 has since dropped off – down 71% from its 2021 peak. It was a major topic at this year’s Money2020 US, with conversations on how the mood has shifted towards sustainable value creation: EBITDA margins have improved by 9% on average.

According to a much-discussed McKinsey report on the new fintech growth paradigm, expansion is no longer a must-do strategy. It may be most advantageous for companies that have strong footholds in their core markets and can use some competitive or ownership advantage to expand elsewhere. 

Those foundations are critical. New markets can be daunting with different licensing systems and fee structures eating into margins and making it harder for neobanks to replicate home success. That’s before we consider the usual costs of introducing brands to new audiences, including significant advertising and marketing budgets. 

Overcoming these challenges requires alternative strategies. One of those is BaaS.

BaaS – not just a dirty word?

It might seem odd to suggest a model that is perceived mostly as ‘a dirty word’ in the US and for which there is a healthy degree of skepticism in Europe. In the latter’s case, the regulatory environment allows companies to operate without relying on third-party services, and there are more opportunities to safely manage operations without sacrificing too much control and sharing of margins.

In the US, the situation is different. Obtaining a banking license is fraught with federal and state-level complexities, creating bureaucracy that can take years to navigate. An established BaaS provider can offer a way of bypassing regulatory roadblocks as they have already been through those processes. 

That doesn’t mean it is straightforward. One of the main issues is the lack of regulatory accountability; neobanks cannot abdicate all compliance responsibility to the BaaS provider. This emphasizes working with appropriate partners. 

Many providers have been set up to offer BaaS solutions; they would not exist otherwise. Synapse, the middleman that collapsed in 2024, is one example. 

How BaaS works for both parties

Yet BaaS providers can also be incumbents. One of the advantages here is that both parties can focus on their core strengths. Incumbents with existing infrastructure and established processes such as risk management can monetize functions that were purely a cost; neobanks, on the other hand, can focus on the user experience and innovative products that meet customer needs. 

In some instances, this is already happening. Revolut uses Lead Bank as its US card issuer and bank partner, while Monzo operates via a partnership with Ohio-based Sutton Bank. In both cases, European neobanks can build customer bases in the US, while leveraging the regulatory knowledge and compliance of the partner institutions.  So far, no European fintech has been able to crack the US market, and Monzo is up against tough local competition – namely $25bn neobank Chime, which has 13m local customers. However, Chime itself has achieved scale by piggybacking on the full banking licences of US partner banks.

Will we see the reverse, with US neobanks entering Europe? Potentially, though the circumstances are slightly different. First, the US market itself is vast. There is a significant opportunity for growth without the need to expand internationally. Second, margins there tend to be higher compared with Europe. Finally, Europe’s neobank sector is highly developed, increasing competition and potentially making expansion less appealing to US counterparts. 

That said, US neobanks and fintechs still have European clients. And as the needs for cross-border payment grow, partnerships with European counterparts could make strategic sense. Unlike traditional banks, many European fintechs have a deep understanding of niche markets, digital-first customer expectations, and agile technology stacks. These attributes might appeal to US players looking to expand their offerings or streamline international operations.

Such partnerships could create a win-win scenario, bridging gaps in compliance, innovation, and customer engagement on both sides of the Atlantic.