Was Revolut’s banking licence worth the wait?
Group would be wise to move gradually with its lending ambitions
Revolut, the $75bn British fintech, finally has a full UK banking licence more than four years after it first applied. Rival bankers, investors and even chancellor Rachel Reeves have been closely following the saga. The group’s 13mn UK customers may wonder what all the fuss was about.
When it emailed users last week to share the good news, Revolut said it was planning “more banking features soon”, but had little detail on what that means. For now, it stressed, “nothing will change”. That’s as true of Revolut itself as it is of the customer experience.
The most obvious gap in Revolut’s banking offering in the UK is its lack of lending, but a licence was not the limiting factor there — there are plenty of large non-bank lenders around, from mortgage providers such as Together to credit card companies including NewDay.
A banking licence makes it easier to compete with them. Banks can fund loans with cheap customer deposits. But funding costs are not the biggest barrier to building a big loan book; the real challenge is having enough risk management expertise to grow safely. Many payments-focused fintechs have struggled to make the leap to lending.
A series of open job advertisements suggest Revolut has lending ambitions, but it would be wise to move gradually. Even with perfect hires, accounting conventions punish companies that try to scale up lending too quickly, as highlighted by the recent travails of New York-listed Klarna.
The second supposed benefit from the new licence is the prestige it confers. There was a widespread view that Revolut’s expansion in countries including the US and India could be held back as international regulators waited for a seal of approval from the Bank of England’s Prudential Regulation Authority.
This may be true, but it was something of a self-inflicted problem. Revolut’s lack of a banking licence was an issue because everybody knew it wanted one. Had chief executive Nik Storonsky never declared it a requirement, there need not have been a problem. The lack of a banking licence has not stopped Chime from acquiring 9.5mn active users in the US.
The defining feature of a bank, from a regulatory stance, is that it holds customer deposits directly and those deposits are guaranteed under the Financial Services Compensation Scheme. That reassurance should make customers more willing to keep larger amounts in their accounts regardless of new products.
At the end of its last financial year, Revolut’s average customer balance was about £575, compared with roughly £1,400 at Monzo and more than £20,000 at NatWest. Convincing users to abandon their other banks is a tough task but Revolut’s customer numbers are so high that even partially closing the gap would make a big difference.
Say Revolut could lift its average balance from £575 to £1,000. With 13mn UK customers, that would represent an incremental £5.5bn in deposits. At current interest rates, that’s an additional £200mn in annual interest income just from parking them in the Bank of England. In practice, higher deposits would likely also lead to higher transaction income as customers use their cards more frequently.
Staying still and waiting for profit to rise has not been Revolut’s strategy so far. Storonsky is a notoriously hard worker. But after a four-year pursuit, even he might be open to slowing down for a minute.