Revolution in the Air

Plus: Buy Now Pay Later, Loan Growth, AIG/Blackstone

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Revolution in the Air

As a finance newsletter, we touch on fintech here a lot. We’ve looked in detail at a host of new entrants into financial services – Wise, Tinkoff, Paytm, Robinhood – all of them attempting to disrupt the traditional way of doing finance. This week, we turn our attention to one I’m particularly close to: Revolut.

I first came across Revolut in 2016 when an early investor showed me around its app and the backend dashboard he had access to. I used to travel a lot and the opportunity to access cheap foreign exchange via a payment card was very appealing. I signed up as a customer and – as the app informs me today – went on to spend £6,438 on my travels through the remainder of the year. 

I knew that if I found the app useful, others would too; I was keen to invest. A short while later the company was out raising its series A and I got the opportunity to participate. 

This week, Revolut became the UK’s most valuable private tech company of all time. It announced a series E fundraising, valuing it at $33 billion. That puts it roughly on a par with NatWest Group, the bank where I had my first account as a kid. 

The massive growth of Revolut is clearly very exciting for me as an investor. But it also raises questions. Last year, NatWest did £11 billion of revenue; Revolut did £261 million. NatWest is on track to make £2.5 billion of profit; Revolut may or may not make a profit. Revolut has a few more customers than NatWest – 16 million versus 12.5 million – but what are those customers worth?

It’s time to sharpen my pencil and update my analysis of Revolut.

Personal Money Cloud

Revolut was founded at the end of 2013 by CEO, Nikolay Storonsky and his co-founder Vlad Yatsenko. Like the founders at Transferwise, discussed here a few weeks ago, the pair were fed up with the charges banks levied on foreign currency transfers. While Transferwise initially focused on making it cheaper to send money back home, Revolut focused on making it cheaper to spend money abroad. Storonsky recalls how he suffered around $2,000 of hidden foreign exchange transaction fees on a trip to the US from his home in the UK.

However you cut it, both markets are large. Revolut estimates that combined, the markets are worth £190 billion in the UK and Europe and ten times that globally. In the world before Covid, people used to travel abroad a lot and they spent money when they went. Revolut estimated that in its initial target market of the UK, more than three quarters of the population went away in the twelve months prior to launch, spending an average £220 per trip. The company’s proposition was that it could save these people from having to pay bank fees on their holiday spend. 

The focus on spend meant that Revolut needed to launch with a payment card. In July 2015, it came to market with a prepaid Mastercard issued by Paysafe. The card allowed customers to hold funds in GBP, Euro and USD, and to spend online and in-store with a globally accepted multi-currency MasterCard linked to their Revolut account. A virtual card was available for online purchases as soon as the account was set up and a physical card was dispatched shortly afterwards. Customer funds would be ring-fenced in accounts at Barclays. 

At that stage, Revolut was just an app – the infrastructure was provided by others like Paysafe, Mastercard and Barclays. But as an app, it offered an effortless and well-designed solution to multiple consumer pain points: transferring money across currencies, spending money abroad and tracking transactions. 

The revenue model was to exploit the spend side of the business to capture a share of the merchant interchange fees earned when customers use their cards. Initially, the company offered currency exchange and money transfers up to £500 for free. Later, it extended the terms of free currency exchange. However, the economics didn’t really add up. In Europe, debit interchange fees are capped at around 0.20% of the value of the transaction – not enough to cover the cost of free foreign exchange. So Revolut was on the hunt for new revenue streams. 

The original model had the hunt fulfilled by subscription fees. Revolut’s seed pitch deck projected £5.7 million of revenue three years after launch, of which over £5 million would come from subscriptions – enough for it to make a profit. It estimated that around 30% of customers would pay around £165 a year in subscriptions. Sure enough, it did launch a subscription product right about then. However, by this time, the strategy had shifted; the important thing wasn’t to hunt for revenue streams, it was to hunt for more customers. 

Global Money App

In its seed deck, Revolut projected 140,000 customers three years out. It got there in nine months. Through viral referral campaigns, Revolut was able to pick up customers very quickly. Media helped: the company featured in the press and on TV. It also moved into new markets early, with 10% of its customers coming from France very soon after it launched there.

Today, the company is in 35 countries and has 16 million customers. It’s a big number, but many of its accounts are likely to be dormant. Third party data (Apptopia) suggests that in June, the app had 3.4 million monthly users and 1.3 million daily users globally.

Revolut’s biggest market remains the UK (19% of monthly average users) where in 2020 it booked 88% of its revenue. Other big markets include Ireland (12% of monthly average users) where 1 in 2 adults is a customer; Romania (10% of monthly average users); and France (7.5%).

Revolut launched in the US in March 2020, and had seen 200,000 customers sign up by year end; total downloads are now running at more than twice that, but monthly average users lag at around 135,000 as of June. Its target market in the US is the 40-45 million people who aren’t originally from the US, who may have greater demand for a multi-currency account and are more likely to want to send money abroad. 

The rapid growth in customer numbers has led to some growing pains at Revolut. Customers complain about funds getting frozen and accounts being closed as anti-money laundering systems pick up too many false positives while customer service is insufficiently resourced to pick up the pieces. In the first nine months of 2020, Resolver, an online complaints service, received almost 4,000 complaints about Revolut, after getting nearly 2,500 for the whole year before.

In addition, in 2019, Wired painted a picture of a toxic work culture where staff turnover was rife. That issue was tackled with a governance overhaul that led to the arrival of several new non-executive directors. The customer issue still rankles with many. 

Nevertheless, with customers come revenues, albeit still of the capped interchange variety and not sufficient to support the business. By the time of the series A round in 2016, the 2017 revenue projection had been upgraded from £5.7 million to £10.0 million. The actual outturn was £12.8 million. But yet again, profits were pushed out. The series A deck pushed breakeven back a year to 2018; three years on, the company has yet to report a profit over a sustained twelve month period. 

It claims to be getting close, though. In 4Q2020, Revolut reported an adjusted operating loss of £6 million, underpinned by profits in November and December. Subscriptions provide a ballast. In the UK, the company offers three tiers of subscription: plus (£30 per year), premium (£72 per year) and metal (£120 per year). They offer varying limits on no-fee ATM withdrawals, no fee currency exchange (the lower tier is limited to £1,000 per month), and the number of free international payments. Last year, subscriptions contributed £75 million to total revenue, with 14% of new customers taking a paid subscription. 

The biggest revenue upside is from new products. Revolut has been a machine at rolling out new products. In 2020 alone, it launched 15 new products and innovations for retail customers. These include interest-bearing savings vaults, open banking, gold and silver trading, junior accounts, cash gifting, rewards, bill sharing, subscription management tools, salary advance and new crypto tokens.

According to the CEO, shipping products fast is important:

“It’s our secret weapon, right, it’s how we compete with other companies. Because ultimately all… businesses, what they do, they give products to people and then the faster you can ship products, the faster you can iterate on products, so the more chances that you will win. As a result, [in the] last 5-6 years, we just perfected the speed – and we pay so much attention to speed and quality of the product – because ultimately, product wins.”

In its rush to deliver product, the company is not embarrassed to mimic others. Its salary advance product is based on a product offered by companies such as Salary Finance, Wagestream and Level Financial Technology [disclosure: I am an investor in Level]. It is in the process of rolling out social trading similar to what is offered by eToro (discussed here). In the future, it has ambitions to pull together its retail ecosystem with its business ecosystem (500,000 customers) to allow businesses and consumers to transact without intermediaries. Sounds a bit like Square

The machine-like product rollout was just as well because the decline in travel during the pandemic was devastating for Revolut’s legacy business. International payment volumes declined by two-thirds compared with pre-Covid levels, leading to a 12% decline in overall revenues between the first and second quarters. Fortunately, stock and later crypto trading picked up the slack. For the full year, card and interchange revenues were up 28% to £95 million, but fees from foreign exchange and wealth were up 150% to £80 million.

Revenue per customer reached around £36 on an annualised basis in the first quarter of this year, up from around £21 for the full year 2020. Similar to Robinhood, which we discussed last week, the numbers are small. In US Dollar terms, the first quarter revenue run rate is equivalent to $50 per customer. This compares with around $90 per customer at US challenger bank Chime (2020) and $137 at Robinhood (1Q21). At incumbent banks, the numbers are larger. NatWest generates around $420 of revenue per customer and in the US, Bank of America and Chase generate over $500 per customer. 

The difference is of course that challengers can in principle scale at low cost. Revolut is still growing its customer base rapidly through referral, although it’s unclear what the return on a customer acquisition is when the referral incentive is £50 (even if the new customer does have to make three transactions to qualify). In 2020, the gross margin of the business improved from 29% in the first quarter to 61% in the fourth. Underneath gross profit, there’s £226 million of administrative expenses; right now that expense base is growing more quickly than revenues as the company invests in expansion, but at some point that will slow. Indeed, the company already employs more compliance personnel per head than major UK banks, so it may not need to invest as much there. Based on LinkedIn data, 16% of its headcount is employed in compliance compared with 8-9% at larger UK banks. 

Global Financial Superapp

Like other consumer fintech companies, Revolut has converged on the super app strategy. “One app for all things money,” is the lede on the company website. “We are building the world’s first truly global financial superapp.” Unlike others, though, it doesn’t have a core profitable business. Chime has unregulated debit interchange – it doesn’t suffer the cap that Revolut does in Europe. Robinhood has payment for order flow. Tinkoff in Russia has credit card lending. 

Revolut has two things going for it: it wants to be global and, unlike some of the others, it wants to be a bank. 

“Our vision is we want to build a global bank… sooner or later, someone will do it, and we want it to be us.” [Source]

Revolut is entering new markets at a rate of 5-10 a year. It typically spends up to two years on the ground before launch and invests between $10 million and $20 million in the process. Revolut reckons it can outgrow local competitors in the majority of countries it enters once it turns on its marketing campaigns.

It’s a tough challenge, though. There’s no real precedent for a global consumer bank. Citi and HSBC both tried, but retrenched from their global ambitions in waves. HSBC recently gave away its French business, but years earlier had given up on its slogan ‘the world’s local bank’. Citi is close to selling its retail banking operations in South Korea as part of its strategy to exit consumer banking in 13 markets across Asia and Europe.

At a recent investor event, the CEO of Tinkoff took a sideswipe at Revolut: “Our model that we’re thinking about at the moment is not a light model, where you skim off a few hundred thousand customers in 20 different markets. That’s not what we’re thinking about.”

Revolut also wants to be a bank. Right now it is regulated as an e-money issuer in the UK, although it has a banking license in Lithuania. It sits on £4.5 billion of customer funds (£310 per customer) which it needs to hold in cash at accounts at authorised financial institutions as a safeguarding mechanism. A banking license would bring three benefits. It would allow Revolut to invest customer funds more broadly, for example by offering loans. It would also provide customers with deposit insurance on their funds (although it’s not clear how much of an obstacle this is to gathering funds; Wise sits on customer funds averaging £2,300 per account without insurance). Finally, a banking license would give Revolut access to central bank facilities. As chairman Martin Gilbert said recently:

“​​The banking license would be pretty advantageous for us … at the moment, one of the big disadvantages we have is we might have £3bn or £4bn on overnight every night on negative interest rates, so you can see the drag on earnings that that has, because we have to safeguard clients money obviously because we’re not a bank.” 

In the US, SoFi is seeking a banking license and has indicated that it could add $200 million to $300 million per year to its baseline EBITDA projections over the next few years. Its business model focuses much more on the lending side than Revolut’s but it reflects the appeal of a banking license.

The downside is of course the cost. Revolut currently has to operate with only £63 million of capital. A banking license would ramp that capital requirement, which is one of the reasons it has just raised $800 million in its series E.  

There’s another downside, which is valuation. In the same interview, chairman Martin Gilbert said, “We don’t want to be perceived as a bank because banks are rated at a far lower rating than a fintech business, so we really do need to keep that advantage of being seen as fast moving and fee based rather than interest based business.”

That’s not something Revolut has to worry about for a while. It just raised capital at a valuation of 74x last twelve months’ revenue; that compares with NatWest at 2.3x. The question now is whether it can extract sufficient profitability from its customers to grow into that valuation.

Wise came to the market in the UK last week with an unbundled approach to financial services – isolate a product and provide it cheaper than the competition, with no cross-subsidisation. Revolut’s bundled model is different. Its newest shareholders, Softbank and Tiger Global, know that the revenues are out there; they are betting that by spraying products across markets, Revolut can capture some of them.

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Buy Now Pay Later

The Buy Now Pay Later market is hotting up with Apple entering the market in partnership with Goldman Sachs. (I have said before that the most formidable competitor in fintech could be Apple + Goldman Sachs.) Increasingly it looks like Buy Now Pay Later could be a feature rather than a business of its own. 

A good representation of this is in India, where MobiKwik recently filed to go public. The company started out as a mobile wallet in 2009. It now has 101.37 million registered users. In May 2019, it launched a Buy Now Pay Later product (MobiKwik Zip) that enables users to activate a Rs500 to Rs30,000 credit limit in their wallet which they can draw down, interest-free, in 15-day cycles. At the end of the cycle, the user is required to pay what’s due within five days, failing which late fees are applied (the user also pays a one-time activation fee). 

As at the end of March, MobiKwik had pre-approved 22.25 million users for the product, out of which 741,000 had activated. MobiKwik retains some of the risk (5-15%) but passes most of it on to financial institutions. Its advantage is that merchants are already signed up, via its wallet, and it has good data on its consumers via their purchase history. 

In the year to March 2021, the Buy Now Pay Later product contributed 21% to total revenue. A part of the investment case behind the IPO is that this will grow; it’s likely a feature other wallet providers will replicate. 

Loan Growth

A major issue overhanging US banks since the beginning of the pandemic has been the absence of loan growth. JPMorgan’s consumer and business loans were down 3% year-on-year in the second quarter as customer cash balances remain elevated leading to higher prepayments in mortgage and lower card outstandings. But the company is optimistic loan growth will resume. On his earnings call, the CFO said, “we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next.” Bank of America provided a useful chart that backs up the assertion. It shows daily loan balances, with the trough having passed in March. Lending companies will be hopeful of a strong rebound in loan growth in the second half. 


Back in 1998, AIG took a 7% stake in Blackstone. Ten years later, AIG was in financial trouble and had to be bailed out by the US Government. Blackstone’s price was severely affected by the crisis, so the stake couldn’t be used to raise cash, but a few years later AIG was able to exit for a considerable gain.

This week, the two announced a reverse transaction. Blackstone will take a 10% stake in AIG’s life-insurance and retirement-services unit ahead of its IPO. Blackstone will also manage $50 billion of AIG assets, rising to $100 billion over six years. The move is the latest in the convergence of insurance and private equity as insurance companies seek to improve investment returns in their portfolios. It’s a theme we discussed in Other People’s Money – the latest application of a model Warren Buffett developed back in 1967.