TheChek News Flow

DAX:

MDAX:

SDAX:

How Revolut finally won the licence to unlock growth in UK and beyond

Fintech closes in on $45bn valuation as it secures approval from regulators

At Revolut’s Canary Wharf headquarters, neon signs exhort staff to “get shit done”. Yet the start-up’s rocky journey towards becoming a full-fledged bank in its home market has been uncharacteristically slow.

On Thursday, Revolut announced that regulators had granted the London-based fintech a UK banking licence, more than three years after it formally applied. 

The licence decision, which is subject to some restrictions, follows a long tussle between the UK’s most valuable fintech and the company’s regulators over questions about Revolut’s operations and internal controls.

The licence will help support a valuation that could reach up to $45bn if Revolut can pull off a planned sale of existing shares — something that would make it a contender for the title of the UK’s third-most-valuable bank.

It will also allow Revolut to compete with traditional banks by boosting its offering in the UK — and, critically, open the door to licences in other key markets.

Securing a UK banking licence typically takes a year, according to regulatory guidance, but Revolut’s application was stalled by a series of setbacks including the departure of senior executives, accounting problems and concerns about its ownership structure. 

“Revolut was never going to [withdraw its application] because they are too stubborn,” said a person familiar with the discussions. “It was just stalemate for three years.”

For co-founder and chief executive Nik Storonsky, the wait finally ended on Wednesday afternoon when Revolut received a letter from the UK’s Prudential Regulation Authority, the arm of the Bank of England responsible for supervising the country’s banks, confirming its application had been successful, according to a person familiar with the process.

Revolut’s leaders have privately concluded that it was a mistake not to apply for the licence when the business was much smaller, according to current and former staff. Rivals such as Monzo secured their licences when they had far fewer customers, something that Revolut’s bosses came to believe made it easier for them to meet regulators’ demands.

Storonsky’s frustration with the delays boiled over in May 2023 when he criticised the UK for failing to support business and the “long and tiring” licence application process. He said he did not “see the point” in ever listing on the London Stock Exchange, citing a lack of liquidity, the difficulty of doing business in the UK and its approach to tax and regulation.

One person who was approached to work on the licence application said they had turned down the opportunity because of worries that Storonsky’s character would negatively impact the fintech’s relationship with regulators, describing him as “temperamental and volatile” — though hyper-focused on turning out superior products.

By the time of Storonsky’s 2023 broadside, the start-up had already brought in City veteran Martin Gilbert as chair to help manage its relationship with regulators. Its board also includes Michael Sherwood, the former European co-head of Goldman Sachs.

But the company has found it difficult to shake concerns over its governance, controls and compliance, with high staff turnover in key functions. Its chief financial officer and the head of the UK entity that applied for the licence both left last year.

In November, it hired Francesca Carlesi, a former fintech founder and Deutsche Bank banker, to lead its UK business.

It was part of a wider effort to shake Revolut’s reputation as a fast-moving, sometimes reckless, start-up focused on growth at all costs to show that it could become a grown-up, regulated bank with a more conservative approach to risk.

“Nik had this vision that compliance would not be manual with people sat on desks looking through transactions and manually blocking accounts,” said a former senior employee. “He really invested heavily on the technology side of compliance and that just doesn’t sit well with regulators.

“Revolut had to go away from that . . . they had to hire all those people, build all those processes, bring all these bankers in.”

Carlesi’s appointment was viewed positively in the industry. The Italian would “put on a pair of jeans for the office to fit in” with the company’s tech culture but was a “proper banker”, according to one former regulator who knows her.

She has been focused on improving the bank’s compliance culture by creating new approval processes for every feature Revolut seeks to launch, according to another person familiar with the move.

The company has addressed concerns over its internal controls, which caused auditor BDO to warn that the bulk of its 2021 revenues “may be materially misstated”. A clean audit opinion in its 2023 accounts, published on-time earlier this month for the first time in two years, was seen as one of the final steps to securing the PRA’s approval.

The accounts showed Revolut had swung to pre-tax profit of £438mn in 2023, from a £25mn loss in 2022. It has also met a Bank of England demand that it simplify its share structure, a requirement that had prompted a battle with Japanese investor SoftBank.

Revolut has stepped up a charm offensive towards British politicians. With the UK’s general election campaign in full swing in June, Carlesi was one of about 50 company bosses to attend a Labour party event at which Sir Keir Starmer and Rachel Reeves — now prime minister and chancellor respectively — spoke with executives about their plans for the economy and regulation.

Success in obtaining the licence is expected to unlock new growth for a company that has long since dwarfed early rivals such as Monzo and Starling.

The approval paves the way for Revolut to challenge the UK’s biggest domestic banks, allowing it to offer full banking services, including mortgages. In the UK, a priority will be attracting more deposits by paying interest to customers, according to a person familiar with the plans. This will help fund customer loans. 

But the UK licence also removes what has long been seen as a hurdle to international expansion. 

While a Lithuanian licence has allowed it to operate as a bank in the EU, securing a licence from its home regulator was viewed as likely to strongly influence watchdogs in markets where Revolut is seeking to expand, according to people familiar with the matter — not least the US and Australia.

Gilbert, the asset manager who has chaired Revolut since 2020, told the FT: “It’s a huge step to becoming a global super-app and confirms the UK is still a great place to be based because of its globally respected regulators.”

The decision could also help Revolut justify the $45bn valuation it is seeking in an upcoming share sale. If it completes the sale of $500mn of existing shares at that price, it will be one of a select group of fintechs that has managed to increase its valuation from the frothy markets of 2021, when it was valued $33bn.

At that market capitalisation, it would also rival Barclays for the title of the UK’s third-most-valuable bank — behind only HSBC and Lloyds Banking Group, and ahead of NatWest.

It would also put Storonsky’s personal stake in the company at almost $8bn, based an FT analysis of public documents from last August. Gilbert’s holding could be worth more than $850,000. Revolut declined to comment on the figures.

But Revolut is not quite there yet. Its banking licence has been granted under “restrictions”, which is a normal first step as it seeks to meet all the conditions needed to launch as a bank.

Once the restrictions — which include a £50,000 total deposits limit — are lifted and Revolut can operate as a bank, its 9mn UK customers will also be included in the Financial Services Compensation Scheme, meaning deposits of up to £85,000 will be protected if the company were to collapse.

The fintech has been told the process typically takes a year. The company would seek to complete it faster than that, one person familiar with its strategy said. But others who have gone through the same process are more sceptical.

“It’s a very involved process to demonstrate ultimately that the control environment of the company is fit for purpose . . . I don’t know that it’s taken many companies less than a year,” said Atom Bank chief executive Mark Mullen. 

Revolut is hiring a UK regulatory head, whose job will include “communicating clearly with regulators and the business” and working with Revolut UK board and executives to ensure regulatory developments are factored into decision making, according to job adverts on LinkedIn. 

The company’s hope is that the UK licence will kick-start its efforts to win market share from the UK’s traditional banks.

Edward Firth, an analyst at Keefe, Bruyette & Woods, said the fintech would be a threat to other digital banks and incumbents with “semi-comatose” customers who could easily be enticed by better interest rates and cashback offers.

“I assume they will now start to compete,” he said.

The nascent firm created by a 2021 Spac merger will soon manage more than $200bn

Blue Owl has earned a high public market valuation. And the private capital upstart is showing that it is not afraid to use it. So far the manager has announced $1.4bn worth of deals this year, across three acquisitions. This month, in its latest transaction, it acquired the credit manager Atalaya Capital Management, for $450mn.

More interestingly, it has used its own shares for about two-thirds of the total consideration paid across the trio. Companies and private capital firms, in particular, are typically reluctant to issue new stock and the subsequent shareholder dilution. But private capital firms do not like to take on debt at the manager level either. Blue Owl itself is a nascent firm that was created by a 2021 special purposes acquisition company, or Spac, merger and will soon manage more than $200bn. 

Its growth prospects and focus on steady private credit investing, as well as ownership stakes in other large private equity managers, has intrigued Wall Street. Its price to trailing last 12 months cash earnings per share ratio is a healthy 28 times. This formidable currency has allowed Blue Owl, whose equity value is $26bn, to make big bets.

The largest deal Blue Owl has struck was for Kuvare, an insurance investing specialist. A third deal, for Prima Capital Advisors, got it deeper into real estate. All three acquisitions were for firms led by their founders. Stock payment can be a form of incentive to persuade the target’s employees to continue running hard. All three deals also include earnout incentives where the targets’ respective owners can earn additional payouts if operating targets are hit.

Earlier this year, Blue Owl sold $750mn of 10-year bonds at a healthy coupon of 6.25 per cent. Comparing that after-tax debt cost with its stock market valuation roughly suggests why share issuance is a reasonable choice.  

Integrating people-driven businesses, especially when the Masters of the Universe are involved, is hard and Blue Owl has reportedly had its challenges. Blue Owl’s quick ascent and emphasis on M&A as its rocket fuel is also notable. Many other firms have preferred to grow steadily and organically. But Blue Owl sees the future as now and wants to win the land rush. The good news for them is that they have shown enough promise to Wall Street to make their stock currency very deployable. 

Russia’s surprising consumer spending boom

Heavy government expenditure and labour shortages have led to a sharp rise in real wages and consumption but the economy risks overheating

Immediately following Russia’s full-scale invasion of Ukraine in 2022, Anton*, a restaurateur in St Petersburg, feared the worst for his business.

Foreign visitors disappeared. Interest rates soared as Russia anticipated an economic collapse fuelled by western sanctions. Locals had no time for eating out, he says.

But Anton need not have worried: over the past two years the situation has completely reversed. Russians are flush with extra cash — and eager to part with it.

As the war has dragged on, rising salaries in a booming wartime defence industry have forced civilian businesses to follow suit in order to attract workers at a time of acute labour shortages. The result is that Russia has unexpectedly found itself in the midst of a consumer spending boom.

“Real wages are skyrocketing,” says Janis Kluge, an expert on Russia’s economy with the German Institute for International and Security Affairs. “You have people who hardly earned any money before the full-scale invasion . . . who suddenly have huge amounts of money.”

Real wages have grown by almost 14 per cent, and the consumption of goods and services by around 25 per cent, according to Rosstat, the Russian state statistics agency.

A further bump in real wages of up to 3.5 per cent is expected this year, alongside an expected 3 per cent jump in real disposable income, according to Russia’s Center for Macroeconomic Analysis and Short-Term Forecasting. The unemployment rate, forecast to hit between 7 and 8 per cent in 2022, is at 2.6 per cent — a record post-Soviet low.

This explosive pay increase is being felt across the socio-economic spectrum, dramatically transforming life for a swath of blue-collar workers.

Weavers, who were earning the rouble equivalent of $250-$350 a month in December 2021, can now earn as much as Rbs120,000 ($1,400) a month, says political scientist Ekaterina Kurbangaleeva. The average salary for long-distance truck drivers has risen 38 per cent year on year.

At the same time, western sanctions and Russian capital controls have grounded funds from wealthy citizens, driving up the luxury sector and giving Moscow and St Petersburg, long famed for its culture, the air of modern-day boomtowns.

One Moscow resident says she and her husband have been keeping a tally of the number of luxury vehicles spotted outside their high-end apartment complex. A neighbour has been showing off photos of his pet lion.

“Everyone who is upper-middle class, they’re just enjoying a really good life,” says Sergei Ishkov, a Moscow investor and entrepreneur, highlighting the number of new restaurants and a booming Russian ecommerce market.

One Russian oligarch told the FT that “almost everyone I know who left Russia after February 2022 and either came back or travels there says Moscow is the best city in the world.”

For many Russians, there is a feeling that their finances are getting better. More than 13 per cent of Russian people rate their financial situation as “good” — the highest since records began in 1999, says Rosstat. Those rating it as “bad” or “very bad” is also at an all-time low, about 14 and 1 per cent respectively.

Now the question is how long the party can last and what the consequences may be.

Economists point out that the boom has largely been fuelled by state spending, investing directly in the defence industry and through support to other sectors, such as agriculture, infrastructure and the real estate market.

The central bank has fought to counter such initiatives and rising core inflation of 8.7 per cent, notably keeping its interest rate at 16 per cent since December 2023.

Some economists forecast a slowdown as soon as this autumn.

“If one would just look at the numbers, the macroeconomic policies of Russia are completely [unbalanced],” says Iikka Korhonen, director of the Bank of Finland Institute for Emerging Economies.

“It tells you about the spillover of this big spending boom on other sectors of the economy,” he says, pointing to an increase in prices. “So far they haven’t really been able to get inflation down and it has been a worry for the government and the central bank.”

For now, the newfound wealth of Russian consumers is reshaping the domestic economy and society itself.

The demographics that have seen the biggest change in income are those working for the military and groups of blue-collar and grey-collar workers, says Kurbangaleeva, the political scientist. A courier can now earn Rbs200,000 a month — the same as members of the Russian Academy of Sciences, made up of some of the country’s leading academics.

“People are getting these higher salaries,” says Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center. “So what are Russian people doing? They’re consuming like crazy and this consumption creates domestic demand.”

Retailers and consumer businesses are rushing to respond. Rostic’s, Russia’s KFC successor, plans to open up 100 new stores this year, while takeaway coffee consumption in the country has never been higher. Domestic tourism is also thriving.

A person from a Russian travel booking company notes that due to sanctions, which had restricted the ability of airlines to expand and service their fleet, demand for internal flights was soaring even though airfares are rising. “For almost the first time, it has become profitable for airlines to fly around Russia,” the person says.

Those with previously low incomes are increasing their demand for durable goods such as better housing or cars as well as services, including home repairs, tourism and dining, says Olga Belenkaya, head of the macroeconomic analysis department at Moscow-based brokerage Finam.

Income distribution is also changing, according to some business owners. “Our customers used to be a creative class and young people. Many have left,” says Albert Razilov, founder of the limited-edition footwear brand Mest, whose sales are nearly three times above prewar level. “Our main clients now are adult men, middle managers of large companies, or business owners often involved in import substitution or IT. They now have money to experiment.”

The outflow of capital from Russia has also slowed down. In the aftermath of the invasion, the central bank cited capital flight as a risk to financial stability, but recently removed it from the list of concerns.

“In the upper segment, it’s clear: people have a lot of money, they have nowhere to spend it, so they spend it on experiences,” says Anton, the St Petersburg restaurateur. “If earlier they withdrew money, opened some accounts, bought apartments in Montenegro, now all this money is in the country.”

The effects of that are becoming more apparent across a variety of sectors.

Private schools in Russia have seen a growth in demand with a record number of parents paying school fees, for example. On the domestic Russian art market, some pieces are commanding record prices from collectors. Russian auction houses have already raked in more sales in the first half of 2024 than they did annually in any year before the war started, according to an analysis of auction data by the internet project ARTinvestment.RU.

“The internal market is growing because there are still people who want to buy something,” says one Russian art dealer who requested anonymity to discuss the market dynamics freely.

Other sectors, such as leisure, are reaping the benefits of the spending boom too.

Sasha Skolov, creative director of Sila Vetra, a sailing company courting Russia’s middle and upper middle class, says many of its customers — either because of travel restrictions, difficulties getting visas or exorbitant airfare prices — were seeking adventures inside the country, something that never would have happened before the invasion.

The country’s premium market is adapted to give high-end customers the offerings they are used to. “Hipsters who used to go to Italian coffee shops demanding the best specialty coffee in the world can find this specialty coffee in [Russia’s] Altai Mountains,” he says. “This is a phenomenon that has never existed before.”

Russia’s consumer spending boom is a radically different outcome than economists were expecting at the onset of war.

“Two years ago we were expecting a completely different playbook, essentially one in which Russia will have an economic downturn driven by a collapse of exports and unemployment,” says Kluge, of the German Institute for International and Security Affairs. Instead, we are in “a completely different scenario”.

Shortly after the invasion, the Russian central bank solidified the so-called financial fortress, raising interest rates from 9.5 to 20 per cent overnight and introducing capital controls. Russian exports proved more resilient than expected and it was able to secure most of the goods that were subject to sanctions through parallel imports from third-party countries.

By autumn 2022, the Russian government had significantly ramped up military procurements, says Korhonen, the economist. “That has been powering the economy ever since.”

Compared with 2021, the last prewar year, budget expenditures have increased by 20 per cent, while the state’s share in the Russian economy has reached an estimated 50-70 per cent. Russia’s central bank identifies government spending as the main driver of GDP growth, according to a report published in June.

War-related spending — including the production of machinery and clothing for the front line, fuel production and payments to those fighting and dying in Ukraine — rose substantially, from about 23 per cent pre-invasion to almost 40 per cent now.

One of the biggest contributors to the recent consumer boom has been a series of subsidised mortgage programmes.

Shortly after the invasion, the Kremlin significantly ramped up its “mortgages for everyone” programme, which offered cheap loans for new construction that were far lower than the key interest rate. In June, the loan was below 8 per cent compared with 16 per cent, respectively.

“The authorities had to demonstrate that, despite all the shocks and sanctions, people would be able to buy an apartment,” says Sergei Skatov, an expert in the Russian real estate market, pointing out that home ownership carries “the highest value” in post-Soviet society.

The yawning gap between the official rate and mortgage rate created “excessive arbitrage for the new-build market” and drove record sales. The total value of mortgages held in Russia grew 34.5 per cent last year. Though that programme was phased out on July 1, following repeated pleas from the central bank, the effects have been lasting.

“The financial departments of the largest developers can now be compared to investment banks,” says Skatov. “Developers can sell nothing for a whole year and still remain profitable and solvent: they have already sold everything that they could build in the next three years.”

The sharp increase in public spending has alarmed some fiscal conservatives who along with the central bank had been successful at reining in state-subsidised programmes. Now, such funding mechanisms have become more and more prevalent.

“The booming real estate market is boosted by this [state-sponsored] programme of subsidised mortgages,” says one former high-ranking Russian government official.

“Agriculture. Defence. The oil and gas industry — they are financed by the same mechanisms. Before the war we were trying to [limit] this mechanism. It used to be on an exceptional basis — operation by operation.”

To cover a yawning budget deficit, Russia has had to tap into the National Wealth Fund’s assets. As a result, its liquid assets have dropped from Rbs8.7tn in January 2022, or 6.6 per cent of GDP, to Rbs4.6tn at the end of June.

Korhonen notes that while the three-year budget plan foresaw a cut in government spending in 2025 — indicating that the authorities had expected the war to be over by then — a recent push to increase taxes suggests the government may now be more pessimistic and will need to “keep the spending levels fairly elevated”.

The central bank leadership has openly pushed back against higher government spending with little success. Instead, they continue to apply traditional monetary policy measures, such as raising rates, in an attempt to prevent the economy from overheating and inflation taking off.

“The central bank can say they’re not happy but that’s it,” says the former government official. “Who would listen?”

Other economists note that the fact not even the central bank’s record high interest rate has been able to cool consumer growth showed the degree to which the economy was now influenced by state spending.

“The central bank is very conservative,” says Vasily Astrov, a Russia expert at the Vienna Institute for International Economic Studies. “It has applied textbook, real macroeconomic recipes, so they have been tightening,” he adds. “The paradox is that . . . even with these very drastic measures — a very tight monetary policy — they have not been able to cool down the economy.”

The former senior official agrees that the central bank’s traditional monetary policy mechanisms are no longer working as they once were. “The [central bank] built the financial fortress,” the person says. “The economy is much more resilient [but] it’s not responding to the central bank’s tools.”

That may be changing. Belenkaya, of Finam, says her brokerage is already forecasting a slowdown in consumer activity, due to an anticipated slowdown in wage growth and ongoing monetary policy tightening.

“I don’t think real incomes can continue to grow . . . as they currently are,” says the Bank of Finland’s Korhonen. “Production growth rates will start to come down this year. There are simply not enough new people.”

Anton, the St Petersburg restaurateur, has seen this first-hand. “The staff shortage is colossal,” he says. “There are no cooks, no waiters, no bartenders . . . Emigration has crippled me because a lot of guys from the service sector have left.”

Labour shortages are widespread. The defence sector is short of about 160,000 specialists, according to deputy prime minister Denis Manturov, despite half a million people moving from civilian jobs to defence-related ones in the last year and a half. Russia’s labour ministry forecasts a shortage of 2.4mn workers by 2030.

In time, Russia could find itself in “an Iranian scenario where money is trapped in the country, resulting in exorbitant real estate prices, inflated stock market values and low quality of life,” says the Russian oligarch.

The whole problem with the Russian economy is that the big unknown variable in this equation is the war, says Prokopenko, of the Carnegie Russia Eurasia Center. “The whole economic situation becomes a function of what’s going on on the front line.”