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Revolut keeps valuation story alive with strong revenue growth

Gary McFarlane
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Neobank Revolut saw losses triple in 2019. The dire trading performance of the online-only bank follows on from competitor Monzo reporting similarly difficult results.

Both fledgling banks have been hit by the lack of transactions fees they would otherwise have received from travellers doing foreign exchange deals.

Revolut made a pre-tax loss of £107 million, which was triple the loss of £33 million in 2019.

The bank still maintains it is on course to hit its breakeven milestone by year’s end, despite the Covid outlook.

Challenger bank Revolut blames the pile up of losses on rising staff costs. Pointing to company strength, however, revenue growth was on track.

On a year-on-year basis Revolut revenues leapt 189%, from £58 million to £163 million.

There are no share prices to show for Revolut because it is not listed on a stock exchange (see more below for IPO).

Investing in compliance and full-service banking

Following accusations of laxity around anti-money laundering processes, the bank has poured investment into addressing that and customer service and business operations more generally.

During last year, the number of employees rose from 623 to 2,261. It is not clear how many of the total are based in the UK.

Strong revenues showed that the bank has been successful in developing revenue streams alongside its original foreign exchange fees business.

That is something rival bank Monzo was slower to do and it showed in its results. Monzo went so far as to report that it’s continuation as as a going concern could be in doubt.

Revolut said that two thirds of its revenues were from the fees earned when its customers pay for goods and services with its pre-paid debit card.

It added that revenues from share dealing services also helped to diversify income streams. An important part of the trading service now includes cryptocurrencies. With renewed interest in the crypto markets bubbling up, that could prove to be a useful little earner.

Also its fractional trading feature in share dealing will also help it to attract (and/or keep)  the millennials tech-investing crowd. With Apple and Tesla recently indicating that will be splitting stock, the run-up in some tech stocks is such that buying a single share can be prohibitively expensive for small retail investors. Stock trading is commission-free at Revolut.

Gilbert in right place at the right time

The new non-executive chairman, Martin Gilbert, formerly of asset management giant Standard Life Aberdeen, looks like he may be exactly the leader required to take Revolut to the next critical step to operate as a full-service bank.

Co-founder Nikolay Storonsky remains the chief executive of Revolut and is blamed by some for allegedly allowing a toxic culture to develop at the company. Chief technology officer Vlad Yatsenko is the other co-founder of the company in 2015.

Although  Revolut received its banking licence in 2018 from Lithuania, it only began moving customers off its e-money accounts to full banking accounts in 2019.

Deposits had grown to £2.3 billion by the end of 2019 compared with £890 million at the beginning of last year.

The startup bank’s balance sheet has also had timely infusions from February ($500 million) and July ($80 million) funding rounds at a valuation of $5.5 billion.

The size of the increase in the headcount might under other circumstances be seen as profligate, but unless the company invests in customer services and business process for the highly regulated international banking sector, then its plans will never come to fruition.

Revolut to beat the competition?

The neobank space is particularly crowded in the UK, where Revolut’s competitors include Starling Bank, Monzo and Monese.

With these ‘banks’ initially starting out as little more than the purveyors of convenient and cheap  (often free to the customer) foreign exchange services, transforming themselves into full-blown banks is a big ask. Revolut looks like it will be the one that succeeds most efficiently, while others many not survive long enough to execute their plans.

Accenture in a February research report, estimates the customer count at the neobanks to have increased from 7.7 million to 19.6 million last year. However, getting customers to take these platforms seriously enough to pay their salaries into is proving to be difficult.

Worries that leaving the EU could hurt the valuations in the UK’s burgeoning fintech sector have so far proven groundless.

Keep on watchlist for IPO news

Commenting on the results statement, Gilbert said: “We were fortunate — probably more than some others in the sector — in that we [started] raising our capital toward the back end of last year. . . it gives us enough capital to complete the journey and continue to expand the business.”

Revolut is a private company backed by venture capital and is therefore not listed on a public stock exchange as yet.

Although it is unlisted, it will come to the public capital markets at some stage in the future. This will clearly not happen until the bank licence is fully operational for its customers and the average deposits (currently circa £250) start to reflect a bank being used for the full panoply of typical services, chiefly accepting salary deposits and deeper penetration into areas such as lucrative business accounts.

Progress in the US and Japanese markets needs to be watched closely. The company entered the US market in March.

Keep Revolut on your watchlist to monitor for any hints on when an initial public offering of shares to the public will be happening.

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Gary McFarlane

Gary McFarlane

Gary was the production editor for 15 years at highly regarded UK investment magazine Money Observer. He covered subjects as diverse as social trading and fixed income exchange traded funds. Gary initiated coverage of bitcoin and cryptocurrencies at Money Observer and for three years to July 2020 was the cryptocurrency analyst at the UK’s No. 2 investment platform Interactive Investor. In that role he provided expert commentary to a diverse number of newspapers, and other media outlets, including the Daily Telegraph, Evening Standard and the Sun. Gary has also written widely on cryptocurrencies for various industry publications, such as Coin Desk and The FinTech Times, City AM, Ethereum World News, and InsideBitcoins. Gary is the winner of Cryptocurrency Writer of the Year in the 2018 ADVFN International Awards.