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This year was supposed to be one big victory lap for Revolut, the UK’s largest fintech. The firm trumpeted its first ever year of profitability in March, having tripled its earnings year-on-year, and continues to hire at a blistering pace, despite doom and gloom elsewhere in the sector.
This was also the year Revolut hoped to earn its UK banking license. Since it began offering prepaid cards in 2015, the firm has amassed 25 million customers and moved into services from crypto trading to international money transfer. It’s now valued at $33 billion. Getting the license would let it expand further, into insured deposits and lucrative lending products like mortgages and credit cards—in short, to behave like a real bank.
The latest indication, though, is that Revolut will miss out. On May 18, The Telegraph reported that the Bank of England is preparing to reject the company’s license application, bringing to an unhappy end a process that has now dragged on for more than two years.
The Bank of England, which declined to comment, has not issued a formal decision. But a denial, says Stephen Kingsley, a seasoned non-executive director and chair of multiple audit committees at financial institutions, would hitch a “red flag” to Revolut that would damage its growth prospects at home and elsewhere. “It’s quite serious,” he says.
A rejection, should one ultimately arrive, is likely to be the consequence of an unflattering “series of own goals” scored by Revolut, says Kingsley. Against the backdrop of the pandemic and now malaise in the banking sector, the application was bound to face clerical delays and additional scrutiny, but a number of Revolut’s wounds have been self-inflicted, he says.
The firm attracted criticism over its latest financials, assessed by auditor BDO. When the report arrived on March 1, five months late, it described shortcomings in the company’s IT practices that meant three quarters of its revenues—£476.9 million ($591.6 million)—could not be verified with total satisfaction.
Although far from ideal, neither an audit qualification nor a reporting delay is reason in itself to deny a banking license application, says Kingsley. But Revolut’s reaction to the report may have given the regulator pause. The company made a mistake, he claims, in instructing its law firm to explain away the findings in a way that “amounted to a challenge to the auditor’s report”—a move likely to be interpreted by the Bank of England as a lack of respect for oversight. “It’s unheard of,” says Kingsley. “The trouble is that Revolut did not take [the report] seriously. It took umbrage; as if it were an insult rather than a professional observation.”
Likely adding to reservations relating to the audit report, says Devin Kohli, co-head at fintech-focused venture capital firm Outward VC, are concerns about Revolut’s organizational and capital structure.
A string of executive departures since the start of the year—including the company’s CFO, group COO and head of UK banking—won’t have helped matters, he says, and will have left the Bank of England speculating as to the cause of this turnover. “There’s a concern around why people cannot stay in senior positions for an extended period of time,” Kohli says.
Separately, according to the Financial Times, the regulator has taken issue with Revolut’s hierarchical share structure, which it has reportedly demanded the company flatten as a condition of approval. The largest shareholder, Japanese conglomerate SoftBank’s Vision Fund 2, holds so-called preference shares, which bump it to the front of the queue whenever dividends are issued or in the event of a liquidation. The Bank of England wants all shareholders to be treated equally, but convincing SoftBank to forfeit the right to priority, says Kohli, will be neither simple nor cheap for Revolut. “If you’re the largest shareholder, you’re not going to be happy with that.” SoftBank did not respond to a request for comment.
Revolut declined to comment on its reaction to the BDO audit and any ongoing negotiations with shareholders but has said previously that issues identified by the auditor’s report have since been resolved. The fintech is said to be preparing to put out its 2022 financials early, in a bid to dispel concerns about its accounting practices and IT systems, according to the FT.
But a banking license application isn't just a tick-box exercise, it's also about image and feel, says Kohli, which means a clean bill of health from BDO is not in itself sufficient. “It’s quantitative and qualitative,” he says. “The qualitative side is about culture and transparency—words the regulator is increasingly focused on. You can’t put numbers on that.”
At stake is Revolut’s attempt to overhaul its business model: To transition from a money transmitter that just earns revenue on fees, to a fully-fledged bank that profits on the spread between interest paid to depositors and interest received on loans. With interest rates creeping to levels not seen since 2008, says Kohli, repayments on mortgages and other loans represent a “huge profit-driver” for private banks. Revolut has a “very large client base it could drop a lending book into,” he says, but not without a banking license.
Revolut’s “one app, all things money” vision, an attempt to replicate the success achieved in China by superapp WeChat, is also in question. The aim is to supply a full gamut of financial services—from current and savings accounts, to mortgages and credit, to trading and payments—from within a single interface. Without the ability to lend, though, the vision is diluted.
The consequences of a rejection would spill outward into other territories too. A UK banking license could also be an express ticket into other major markets, like the US and Australia. But by the same token, says economist Frances Coppola, who previously worked for HSBC and various other banks, a formal rejection in the UK would not be met well by other regulators. “It’s going to cramp their style,” she says.
There has been rumor of hand-wringing among UK government ministers, under pressure to preserve the country’s status as a fintech hub, over the possibility that Revolut may opt to redomicile if spurned by the Bank of England. But Coppola and Kohli say such a drastic step is unlikely, given the size of its local customer base and the likelihood of encountering similar barriers elsewhere. If Revolut imagines it’ll get an easier ride from other regulators, says Coppola, “it’s mistaken.”
Under a license issued by the Bank of Lithuania, Revolut can operate as a bank within the EU. It currently provides banking services in 28 EU countries. But in the UK, its largest market, a rejection would bring about an identity crisis of sorts. If money transmission is not sufficiently scalable, and banking off the table, Revolut will need to find new lines of business to achieve its growth objectives.
A possible outcome would be that Revolut presses into new banking-adjacent services, Coppola speculates, to offset the lost revenue opportunities. That might involve stretching deeper into cryptocurrency, beyond simple trading and payments, she says, or other services that occupy the gray areas just shy of requiring a license.
Kohli agrees: Revolut will have to “reassess what it’s trying to achieve,” he says. If constrained from a regulatory perspective in the UK, it will have to “find another way” within the bounds of its existing e-money license to finesse its way to superapp status. Revolut did not respond to a request for comment.
The challenge will be in keeping regulators sweet in the process. “It’s a fast train,” says Kohli. “Before people board, regulators want to make sure it’s not going to crash.”
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