One of Britain’s biggest banks isn’t even a bank. For three years, Revolut has been in discussions with UK authorities to secure a local banking licence – without much success. “Hopefully, sooner or later, we’ll get it,” co-founder and chief executive officer Nikolay Storonsky told reporters last week.
The delay hasn’t slowed the nine-year-old fintech. Unconfirmed reports suggest a secondary share sale could value the company at US$40 billion ($53.91 billion), placing it between NatWest Group (US$34 billion) and Barclays (US$41 billion) among the UK’s most valuable financial institutions.
It already has more customers than either of them, surpassing 40 million compared with NatWest's 19 million. And although profit lags — Natwest earns in a month what Revolut earns in a year — the narrow valuation gap suggests investors think the upstart will catch up.
Getting there, though, hinges on that licence. Without it, Revolut is deprived access to the Bank of England and the generous interest rate it pays on deposits.
Unlike licenced banks, which can place funds with the central bank at the 5.25% policy rate, Revolut needs to keep uninsured customer cash ringfenced at commercial banks, where yields are lower.
At the end of 2023, it held GBP5.9 billion ($10.23 billion) for customers in segregated accounts plus another GBP3.1 billion at partner banks. Only GBP9.2 billion of its customer funds comprise traditional deposits, sourced from Europe where the company has a licence thanks to an outpost in Lithuania.
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The contrast in profitability is evident. Although its European business accounts for half of Revolut’s customer funds, it contributes two thirds to net interest income. UK peer Monzo, which received its licence in 2017, generates roughly the same net interest income as Revolut on 40% lower customer balances.
On my calculations, the lack of a banking licence in its home market costs Revolut over GBP100 million a year.
While most of the difference is explained by central bank access, part also stems from lending — another feature a banking licence unlocks. Revolut has a small book of GBP528 million of consumer loans originated entirely in Europe.
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With yields on these loans higher than anything available on cash or bonds, more lending would lead to greater profitability. The company tracks its loan-to-deposit ratio as a performance measure: At 3.5% it lags Monzo at 10.6% and NatWest at 88%.
As it waits, Revolut continues to roll out new products and enter new markets. It makes more money from fees than from net interest income, the traditional mainstay of banking.
Last year, net fee income exceeded GBP900 million — roughly double what the company earned in net interest income — derived from product lines such as card spending, foreign exchange and subscriptions.
These income streams give it ample resources to invest back in the business. Last year, Revolut spent GBP240 million on marketing which the growth in fee income was more than sufficient to absorb. Taking into account all its expenses, the company’s efficiency ratio improved to 67% from over 100% in 2022.
Ironically, one of the reasons its banking licence is slow to be granted is precisely because Revolut is growing so fast.
Since 2013, the UK’s Prudential Regulation Authority has authorised 37 new banks, most recently SilverRock Bank, awarded its licence in May. Most of them are small: SilverRock has just six employees. When it became a bank, Monzo had 65.
In contrast, Revolut currently has a workforce of over 8,100. As a larger business, it is more complex. In 2021, auditors were unable to verify several revenue streams whose growth had outstripped the capability of internal IT systems — a situation that has since been resolved. The company now employs 331 staff in risk and compliance functions.
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By the time it receives its licence, though, the benefits may not be as juicy with interest rates set to come down.
The UK’s new Chancellor of the Exchequer has pledged to continue to pass on rate cuts on to banks via the reserves they hold at the Bank of England — in contrast to other jurisdictions, including in Europe, where rates are tiered and not all of the policy rate makes it through.
That makes a UK banking licence especially attractive, all the more so as long as rates remain higher than elsewhere. Even as Revolut expands abroad, a banking licence in its home market is a critical step on its path to scale.
By Marc Rubinstein for Bloomberg Opinion
