Revolut has embarked on its journey to becoming a fully-fledged bank in the UK after the Prudential Regulation Authority (PRA) recently awarded the firm a banking licence. This paves the way for Revolut to accept deposits and introduce new products such as mortgages and secured loans to its UK customer base, which was last reported at around 9 million customers, making it its biggest market globally.
Nik Storonsky, CEO and co-founder of Revolut, commented, “We are incredibly proud to reach this important milestone in the journey of the company and we will ensure we deliver on making Revolut the bank of choice for UK customers.“
Revolut has acknowledged that its new banking licence comes with temporary restrictions, which are common for new entrants in the UK banking sector. According to PRA guidelines, these restrictions ensure that new banks have adequate time to build out their operations ahead of fully launching.
During this phase, which is also known as the “mobilisation” period, banks are required to secure investment, recruit staff, and strengthen their IT systems. Additionally, the restrictions limit the amount of deposits the new lender can accept before full banking operations commence.
The mobilisation period can “take as little as a few months but cannot continue indefinitely,” according to guidance from the Bank of England, which said it should not take longer than twelve months.
Tackling Past Issues
It’s not lost on industry observers that the PRA took an unusually long time to review and approve Revolut’s licence application. The regulator typically takes one year to issue the coveted permit, but Revolut, having lodged its application in 2021, faced a prolonged wait after officers reviewing its case flagged concerns about its IT systems, accounts, and shareholding structure.
Regulators delayed approval until they received a clean audit of the company’s full-year accounts. This delay stemmed from concerns raised by Revolut’s auditor, BDO, in 2023 about a potential risk of “material misstatement” in the company’s 2021 revenue due to the design of its IT system.
However, Revolut has since implemented significant improvements to its internal controls, resulting in a clean audit opinion for its 2023 accounts. Sources say this development was a key factor in Revolut securing the PRA’s approval for a UK banking licence.
The Bank of England also demanded that Revolut simplify its complex share structure before granting them a banking licence. This requirement led to a protracted dispute with major investor SoftBank, which was eventually resolved to the satisfaction of regulators.
Now that Revolut has overcome these hurdles and obtained a licence, it has a chance to finally compete directly with UK lenders. This is expected to open up new revenue streams and fuel the fintech company’s overall growth. Experts, however, warn that it will need to find a way of remaining innovative in a more stringent regulatory environment.
According to Navina Rajan, senior analyst at PitchBook, Revolut’s UK banking licence “not only enhances their credibility but also opens up new revenue streams through products like loans and mortgages. However, the challenge will be maintaining their innovative edge while adhering to stringent regulatory requirements,” he argues.
Winning Trust Key
Despite successfully addressing regulatory concerns and securing a UK banking licence, Revolut still faces the challenge of rebuilding trust more broadly. The fintech company has been plagued by a series of controversies in recent years.
In 2019, it was revealed that Revolut faced an investigation by the Financial Conduct Authority (FCA) following a whistleblower’s allegations in 2016. The whistleblower claimed that the fintech company was failing to conduct adequate money-laundering checks and was not properly flagging suspicious payments.
According to a former employee who spoke to the BBC, the company’s CEO was resistant to act on the compliance team’s concerns, leading to the departure of key staff, including the chief risk officer and money-laundering reporting officer.
Moreover, compliance staff at British high street banks have previously expressed concerns about Revolut’s compliance practices. Several individuals responsible for ensuring businesses adhere to regulations such as sanctions and anti-money-laundering revealed that some of their peers in the industry remain apprehensive about working at Revolut.
One of the primary concerns raised is the high turnover of compliance staff within the fintech company. According to one source, the reputational risk associated with working at Revolut is “too significant” for many well-regarded compliance professionals.
This is in addition to past concerns over delayed filing of financial accounts, breaches of EU regulations resulting in fines, and co-founder Nik Storonsky‘s Russian connections. Similarly, allegations of an overly aggressive work environment have contributed to a negative perception of Revolut. Winning trust will evidently be key for Revolut if it wants to expand its reach in the UK and attract the right kind of talent to power its growth ambitions.
IPO Plans
Revolut already has European and Mexican banking licences, but lacks one in the US. Experts contend that securing a banking licence in the UK will boost its chances of becoming regulated as a bank in the US, improving its overall growth prospects.
Revolut’s recent acquisition of a UK banking licence could also significantly bolster its valuation ahead of an upcoming share sale. The company is reportedly seeking to sell $500 million of existing shares (including shares held by employees) at a valuation of $45 billion, which would make it one of the most valuable fintech companies globally.
In 2021, Revolut was valued at $33 billion. A $45 billion valuation not only represents a substantial increase, but would also see the fintech company rival Barclays for the title of the UK’s third-most-valuable bank, trailing only HSBC and Lloyds Banking Group. This achievement would also significantly boost the personal wealth of Revolut’s CEO, Nik Storonsky. Based on a Financial Times analysis from last August, Storonsky’s stake in the company could be worth nearly $8 billion at a $45 billion valuation.
Ultimately, Revolut is intent on going public via an IPO and is banking on its robust growth and improved relationships with regulators to win over investors. In 2023, it clawed its way out of losses to post a net profit of £344m, its first profit since its founding in 2015. This is after revenues doubled from £920 million the previous year to £1.80 billion. Customer balances also increased to £18.2 billion, a 38% jump from £13.2 billion a year earlier. The firm’s growth led to an increase in employee headcount, with the fintech company’s staff growing from 5915 employees in 2022 to 8,152 in 2023.
Revolut’s CEO and other executives have publicly discussed the IPO plans on several occasions without committing to a specific timeline. While the company is leaning towards a listing on the Nasdaq, a London IPO remains a possibility.
Author: Acutel
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