Financial ‘super-app’ Revolut has announced it is applying to become a UK bank. But the fintech firm, which boasts over 12m customers and has a private market valuation of over $5bn, faces probing questions to reach the next stage in its evolution.
Revolut, which started business in 2015, has already moved far from its origins as a money transfer and foreign exchange tool. It now offers its clients a variety of financial services, including budgeting and analytics, stock trading, and exposure to cryptocurrencies and gold—all delivered by a mobile phone app.
However, there’s one key thing it lacks as a financial institution—the ability to lend to its clients.
As an electronic money institution (EMI), Revolut cannot reuse client deposits, for example as the foundation for a lending business. Instead, it has to earn its income from fees and commissions.
Revolut cannot reuse its clients’ funds. Instead, it has to earn its income from fees and commissions
Under the traditional banking model, firms benefit from the interest margin between the rate paid on deposits and the rate charged from overdrafts and loans.
For example, UK bank RBS charges a rate of 39.49 percent a year on overdrafts in its standard, ‘Select’ account, while paying clients no interest on deposits—generating a margin of nearly 40 percent.
For Revolut, gaining access to such a revenue stream makes sense, given the cut-price competition on fee income in the fintech sector.
But there’s another big potential benefit in converting to bank status. Being a bank helps reassure clients about the safety of their funds.
Speaking to the UK’s Sunday Times on January 10, Revolut CEO Nikolay Storonsky said a Revolut survey had found that 50 percent of respondents would be willing to deposit their salaries with the firm if their money were covered by a deposit guarantee scheme.
By default, a UK banking licence provides a UK-based customer with £85,000 of cover from the government-run Financial Services Compensation Scheme (FSCS). EMIs have no such cover.
It’s probably no coincidence that Revolut is seeking to upgrade its UK regulatory status just a few months after the Bank of England governor, Andrew Bailey, warned of the risks of a digital money ‘Wild West’ as a result of the heady growth of fintechs.
Bailey’s comments came shortly after the June 2020 collapse of German fintech firm Wirecard, which led to millions of customers of payments apps temporarily losing access to their money.
Bailey said regulators needed to explain to clients of EMIs and payment firms, such as the debit card issuers caught up in the Wirecard collapse, that their money was less secure than that held in a bank.
Unfortunately, users of apps like Revolut and identical-looking ones run by banks are likely to have a hard time distinguishing between their respective levels of protection.
And many media articles comparing banks and EMIs routinely lump the two categories together under the label of ‘challenger banks’ or ‘neobanks’.
But the difference is stark: if your UK bank goes bust, the FSCS says it aims to repay deposits (up to the £85,000 insured limit) within seven days. But if your EMI fails, you face a much longer wait, plus the possible erosion of some of your savings.
Revolut’s own history has added to the potential confusion.
In 2018, the firm said it had acquired a banking license from Lithuania’s central bank and was planning to use the EU’s ‘passporting’ rules to use this licence to operate in other European countries.
Under the licence, depositors with Revolut’s Lithuanian bank were supposed to be protected by a proposed common European Deposit Insurance Scheme (EDIS), guaranteeing individual deposits up to €100,000.
But the EDIS has so far failed to get off the ground, largely because Germany is wary of funding a guarantee for depositors at weaker banks in other EU countries.
If a Lithuanian banking licence may not mean much in practice, it has at least helped Revolut lay some claim to the word ‘bank’.
“It is disingenuous of you to claim that we are ‘not a bank’”
Chad West, Revolut’s UK director of marketing and communications, recently took issue with a LinkedIn post by payments expert David Parker, where Parker had stressed that Revolut is not a bank and should not have been included in a ‘Challenger Banking Overview’ published by Everly.eu, an online journal specialising in fintech.
“Revolut has a European banking licence, which has now been operationalised in several EU markets. While we may not be a bank in every market, it is disingenuous of you to claim that we are ‘not a bank’,” West said in response.
Confusingly, the firm says on its own website that it is—and isn’t—a bank.
“In 2018, we were granted an EU banking licence by the European Central Bank. But, confusing as it may seem, that still doesn’t make us a bank,” Revolut said in a 2019 blog.
“Our ‘not a traditional bank’ label allows us to operate more like a technology company than a typical financial institution,” Revolut said.
“That means we can move faster and invest in our products and services differently than a traditional bank might. Instead of focusing on where to invest deposited funds, our primary focus is bringing you a beautiful and seamless experience,” the firm said.
“Revolut still has a long road ahead before it clinches the licence”
According to Sifted, another fintech-focused publication, there is no certainty that Revolut will achieve its desired status in the UK.
“Revolut still has a long road ahead before it clinches the licence, which will allow it to house, guarantee, and lend out British users’ deposits,” Sifted’s Isabel Woodford said last week.
“Approval is set to take up to two years, assuming it’s successful at all (over 50 percent of applicants are). The next stage will involve scrupulous interviews with key executives, due-diligence of its main investors, and stress-tests of its controls and complaints procedures,” said Woodford.
Revolut may be betting that the size of its customer base and the fact that it raised nearly $600m in capital last year will help convince regulators it’s better to have the firm within the supervisory tent, with a state guarantee of deposits, than outside.
But there’s also no doubt that, amidst the ongoing boom in cryptocurrencies and stablecoins, central banks and regulators are seeking to draw a dividing line between the government-approved financial system—with the payment protections that ensure consumers’ money will work as intended—and non-state-backed money.
In its past business strategy, Revolut has deliberately positioned itself right on that divide. But now it looks as though it will have to come down on one side or the other.
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