The year 2023 should be a big win for Revolut, the United Kingdom’s biggest fintech. The company announced its first-ever year of profits in March after tripling its profits from a year earlier, and it continues to hire at a rapid rate despite the gloomy mood elsewhere in the industry. This year, the company is also hoping to get its UK banking license.
Ever since it began offering prepaid cards in 2015, the company has attracted 25 million customers and has transitioned to services ranging from crypto trading to international money transfers. It is currently valued at $33 billion dollars. Obtaining the license would allow it to expand further, into insured deposits and lucrative lending products like mortgages and credit cards, in short, to act like a real bank.
However, the latest signs suggest that Revolut will be left behind. On May 18, the Telegraph reported that the Bank of England is preparing to reject the company’s license application, bringing an unfortunate end to a process that has now dragged on for more than two years.
BOE issues no formal decision
The Bank of England did not issue a formal decision on the matter. But a refusal would send Revolut a red flag that would hurt its growth prospects at home and abroad, says Stephen Kingsley, a veteran non-executive director and chair of several audit committees at financial institutions.
“It is pretty serious. A rejection, if it does eventually happen, is likely to be the result of an unflattering streak of own-goals scored by Revolut,” Stephen Kingsley said.
In the context of the pandemic and the current malaise in the banking sector, the application was bound to face delays from the authorities and additional scrutiny, but he said he inflicted a number of Revolut’s wounds on himself.
The company has faced criticism for its latest financial figures, which were assessed by the auditor BDO. Arriving five months late on March 1, the report detailed deficiencies in the company’s IT practices that caused three-quarters of the £476.9 million ($591.6 million) in revenue that could not be verified with complete satisfaction.
According to Kingsley, neither qualification nor delay in reporting is a ground for rejecting an application for a banking license. But Revolut’s reaction to the report may have given regulators pause. He alleges the company erred in instructing its law firm to explain the findings in a way that would amount to a challenge to the audit report, a move the Bank of England likely denounced as disrespect for regulators would be laid out.
“This is outrageous. The problem is that Revolut did not take (the report) seriously. It needed a push, as if it were more of an insult than a professional observation,” Kingsley said.
Capital structure to reinforce
According to Devin Kohli, co-head of fintech venture capital firm Outward VC, concerns about Revolut’s organizational and capital structure likely reinforce caveats surrounding the audit report. A string of executive departures since the start of 2023, including the firm’s CFO, group COO and head of UK banking, have not helped the matter, he says, leaving the Bank of England speculating as to the cause of those turnovers.
“There’s a concern around why people cannot stay in senior positions for an extended period of time,” Devin Kohli said.
Separately, according to the Financial Times, the regulator has objected to Revolut’s hierarchical share structure and has reportedly called for the company to be flattened as a condition of approval. Its largest shareholder, Japanese conglomerate SoftBanks Vision Fund 2, holds what it calls preferred stock, which puts it at the front of the queue when it issues dividends or in the event of liquidation. The Bank of England wants all shareholders to be treated equally, but convincing SoftBank to give up the right of precedence would not be easy or cheap for Revolut.
“If you are the largest shareholder, you would not be happy with that,” Kohli said.
Fintech is reportedly preparing to release its 2022 financials ahead of schedule to address concerns about its accounting practices and IT systems, FT noted.
According to Devin Kohli, a banking license application is not just a tick-box exercise; it is also about image and feel. A clean bill of health from BDO is not in itself sufficient.
“It is quantitative and qualitative. The qualitative side is about culture and transparency—words the regulator is increasingly focused on. You cannot put numbers on that,” Kohli said.
At stake is Revolut’s attempt to overhaul its business model: from a money broker that earns nothing more than fees, to a full-fledged bank that profits from the spread between the interests paid to depositors and interest received on loans. As interest rates climb to levels not seen since 2008, Kohli says mortgage and other loan repayments are a huge profit driver for private banks. Revolut has a very large customer base that could bring a loan book but does not without a banking license.
Revolut to replace WeChat?
Revolut’s ‘One App: All Things Money’ vision, an attempt to replicate the success of superapp WeChat in China, is also on the bid. The aim is to offer the entire range of financial services, from checking and savings accounts to mortgages and loans to trading and payments, via a single interface. However, without the ability to lend, the vision becomes watered down.
The consequences of a refusal would also affect other areas. A UK banking license could also be an express ticket to other major markets such as the US and Australia. But according to economist Frances Coppola, who previously worked for HSBC and various other banks, with the same token, a formal rejection in the UK would not be met well by other regulators.
“It’s going to cramp their style,” Coppola said.
There have been rumours among UK government ministers, who are under pressure to uphold the country’s status as a fintech hub, about the possibility that Revolut could opt to relocate if it is rejected by the Bank of England. But Coppola and Kohli say such a drastic move is unlikely given the size of the local customer base and the likelihood of encountering similar obstacles elsewhere. Coppola says that if Revolut assumes it will be more easily taken down by other regulators, then this perception is wrong.
With a license issued by the Bank of Lithuania, Revolut can operate as a bank within the European Union. Banking services are currently offered in 28 EU countries. But in the UK, its largest market, a rejection would trigger something of an identity crisis. With money transfer not scalable enough and banking off the table, Revolut will need to find new lines of business to meet its growth goals.
One possible outcome would be Revolut pushing into new bank-related services, Coppola speculates, to make up for lost revenue opportunities. This could include digging deeper into cryptocurrency beyond simple trading and payments, or other services that fill the grey areas that come short of being licensed.
“Revolut needs to reassess what it is trying to achieve. If it is restricted from a regulatory perspective in the UK, it will have to find another way to achieve superapp status within the confines of its existing e-money license. It is an express train. Before people get in, regulators want to make sure it doesn’t crash,” Kohli said.
Revoult in US, Japan
Recently, Revolut expanded into Japan and the US, increasing its workforce from 1,500 to 6,000. In November 2020, the company broke even and became the UK’s most valuable fintech company with a valuation of £4.2 billion. An $800 million funding round in July 2021 took the company’s value to $30 billion back then, making it the UK’s most valuable tech start-up at the time.
As Revolut does not have UK bank status, it cannot compensate victims of authorized push payment fraud. In the UK, the 85,000 protection of funds deposited with a bank through the Financial Services Compensation Scheme for e-money is not available. In March 2019, Revolut merged with Dax, the same year the company’s chief financial officer, Peter O’Higgins, resigned. TechCrunch reported that he quit due to allegations of compliance violations, but Revolut denied he left for those reasons.
In July 2019, Revolut launched commission-free stock trading on the New York Stock Exchange and Nasdaq, initially for clients under its Metal plan. This was then made available to all users. Meanwhile, the company recently announced a global deal with Visa, following which it expanded into 24 new markets and hired 3,500 additional staff.