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Revolut: over-hyped and immature? Yes and no …

Last October I wrote a piece on Revolut, questioning its valuation which, at that time, was estimated to be anything up to $10 billion:

They claim to have 8M customers. Let’s assume *all* of them are active. If they are “valued” at $10Bn that’s a per customer lifetime value of $1,250 or £1,000.

Their premium fee is £6/month or £72/year. That’s 14 years to break even, assuming that’s the only revenue source (it isn’t). Even assuming fees for debit card usage and thin margins for FX, that’s probably a 10 year break even horizon.

At a P/E of 20 (= 2x JPM) they’d have to be making $500M of net income to be worth $10Bn. They made £58M of revenue (a great feat). Revenue is not net income.

The assumptions you’d have to believe to make this valuation work are pretty astonishing. Let’s see if there are believers out there after the recent public market “revaluations” and the apparent retreat of a major source of private capital.

Since then, there’s been a lot of coverage of the company and their last funding round in February, where they successfully raised $500 million on a valuation of $5.5 billion.

That funding round’s timing was apposite, as lockdown world rapidly followed. Now, they are even in acquisitive mode. According to The Financial Times:

British fintech Revolut is looking to use some of the proceeds of its recent $500m fundraising to buy rival technology companies that have been hit by the coronavirus pandemic.

Nikolay Storonsky, chief executive, told the Financial Times that Revolut had “a real opportunity” to benefit from the crisis, despite suffering a substantial hit to its revenues as lockdowns around the world caused a drop-off in card transactions …

Mr Storonsky said he was now looking to build on Revolut’s roots as a card for travellers, by targeting deals in areas such as travel aggregation, which would allow customers to buy flights or rent cars through the Revolut app when travel restrictions are finally lifted. 

“A lot of travel aggregators are in trouble at the moment — we could probably purchase one and sell flight tickets at cost and be 10 to 15 per cent cheaper than everyone else,” he said. 

Interesting, and it led to the FT’s retail banking correspondent Nicholas Megaw – someone I have criticised and then applauded – to write an in-depth analysis of Revolut’s past, present and future.

It’s a long read (over 4,000 words), but here is an abridged version for those who don’t subscribe:

Revolut is the most hyped fintech in Europe. Can it grow up?

Since its launch in 2015, Revolut has managed to build a small army of diehard fans among its 12 million customers.

Revolut was originally set up to help travellers avoid expensive foreign exchange fees by offering a mobile phone app and card that let them change money into about 30 different currencies at market rates.

For the vast majority of customers, it is still not a full-service bank — it does not yet write any loans, for instance — but the app has expanded rapidly to offer a wide range of products from stock and cryptocurrency trading to daily budget management …

The commitment of customers has encouraged investors to sink more than $800m into Revolut, making it Europe’s joint most-valuable financial technology start-up along with Swedish store credit company Klarna …

Revolut’s success has made one of its founders the UK’s youngest self-made billionaire.

Nikolay Nikolayevich Storonsky was born in 1984 in Moscow. The son of a senior engineer at state-owned gas company Gazprom, he studied physics and became a champion swimmer at the Moscow Institute of Physics and Technology. Having started his career as an equity derivatives trader at Lehman Brothers, he switched to Credit Suisse in 2008, shortly before the financial crisis. It was there that he met his co-founder Vladyslav Yatsenko, a software engineer who previously worked at Deutsche Bank and UBS …

In an interview in Revolut’s recently expanded Canary Wharf headquarters in early March, he said he was confident that the company would become a “financial superapp”. He wants to follow in the footsteps of companies like Alipay and WeChat Pay, which have revolutionised financial services in China by replacing cash — and banks — as the main way to pay for more than $17 trillion worth of transactions a year …

The average customer looks almost exactly like Storonsky: 35 years old, professional, urban and male. The company says 60 per cent of its total account holders are men, but doesn’t provide any data on the split among its most active users. In contrast to Revolut, rival Monzo uses a playful image to promote its ambition to ‘build a bank with everyone’. But even established names struggle to crack fintech.

While most fintechs have focused on one or two geographic markets or specific products, Revolut has followed the sometimes controversial approach of US-based start-ups like Uber and WeWork, quickly planting flags in as many places as possible. It now operates in more than 30 countries, helping it storm ahead of Monzo and other domestically focused rivals such as Starling in terms of revenue and customer numbers. With more than 12m accounts opened, Revolut also has more than twice the number of customers of its closest European rival, Germany’s N26.

“Focusing on travel at first helped,” says Pinar Ozcan, professor of entrepreneurship and innovation at Oxford university’s Saïd Business School. “Rather than going for a full banking licence from the beginning and spending months going through regulators, it became popular before a lot of others were even able to launch their current accounts.”

As business faces the worst pandemic of modern times, the February fundraising deal that valued Revolut at $5.5bn, more than twice as much as Bank of Ireland, Ireland’s largest traditional bank, is another factor in its favour. The company entered the crisis in a more secure position than most of its peers, some of which have already had to cut or furlough hundreds of staff.

“You’re going to have winners and losers, and quite a few losers,” says Aurelie L’Hostis, fintech analyst at Forrester Research. “The crisis is going to massively impact the fintech sector. Revolut has been pretty lucky to raise a huge amount of money just before the crisis hit.”

If it is unable to make it through and complete its transition into a major financial institution, investors will question whether any fintech can survive …

[However] Revolut discovered a spate of attempted money laundering activity in 2018 and some former staff have criticised its past compliance practices, but it has never been publicly criticised by regulators, unlike some rival banking start-ups. It has, however, faced scrutiny over the decision to base its European bank in Lithuania — hardly a major centre for international finance.

Revolut received a banking licence in December 2018, saying it had picked the country for its “incredibly fintech-friendly environment”. However, the Baltic region has been involved in a string of banking scandals in recent years and some worry about whether such small economies can safely support a major multinational bank.

“Fintech is prone to the same risks that the financial sector faces . . . [and] the technology brings its own new risks,” says Stasys Jakeliunas, a Lithuanian MEP who has waged a political campaign against Revolut. “It is difficult for supervisors to control because of a lack of resources and the huge number of companies arriving at the market.”

Jakeliunas, whose parents were exiled for criticising Lithuania’s Soviet rulers, was initially worried by local media reports that attempted to link Revolut to the Russian government. Storonsky’s father is the current deputy director-general of Promgaz, the research institute of Gazprom, while DST Global, one of Revolut’s largest backers, has previously invested money from Russian state-owned businesses elsewhere.

Storonsky issued a carefully worded letter in January 2019 trying to address such concerns about Russia while being “respectful of the history” of Lithuania. He said his family background was “irrelevant”, denied any suggestion Revolut was funded by the Kremlin and cautioned that “scaremongering campaigns” could deter foreign investors …

Yet the majority of Storonsky’s critics are more concerned that Revolut has simply grown too fast to stay on top of the complexity of running a global financial services platform.

“I never saw a clear mission or vision,” [one] early employee says, pointing to the decision to introduce cryptocurrency trading just as the price of bitcoin hit an all-time high in late 2017. “The crypto add-on was just because crypto was hot . . . I cannot for the life of me tell you what overall problem Revolut is addressing.”

Storonsky admits the company hasn’t always followed a grand plan. “You try things, sometimes they work, sometimes they don’t,” he says …

The company lost more than £55 million between 2015 and 2018 — but it has not been particularly spendthrift by industry standards. Royal Bank of Scotland, which is controlled by the British taxpayer, spent almost £100 million to prepare for the launch of Bó, its in-house attempt at an app-based bank that closed after less than six months. Goldman Sachs’ effort to move into consumer banking, Marcus, lost $1.3 billion in its first three years …

[And] the company has started to tacitly admit that computing power alone is not enough to repel financial criminals while also servicing its genuine users. Although it is relatively easy to scale up cloud computing technology, the same cannot be said for human compliance and customer service specialists. Revolut has had to hire 1,000 of these since last June.

“In the end, it’s all about people,” says Storonsky, a startling admission for someone who once said “the whole point of a fintech is about automation”.

The company’s attempt to transform into something more akin to a traditional bank is also evident at the top of Revolut, which has recently hired a string of executives and directors from the very industry it is trying to disrupt. In part, these changes were pushed on the company by its investors. Its February fundraising took longer than planned because shareholders demanded evidence that it was on the road to becoming a more mature company that could turn a profit …

Storonsky’s choice for Revolut’s inaugural chairman highlights its attempts to move towards the mainstream. Martin Gilbert, who joined in January, is co-founder of fund management giant Aberdeen Asset Management and the prototypical City grandee: a whisky-swigging bon vivant who has golfed with Donald Trump and is a regular at the World Economic Forum in Davos.

If you want to know the real low-down, read Nicholas’s full report.

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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