New figures show how quickly Europe's biggest fintech and main headache for the retail banking industry is growing. And yet, Revolut remains deeply misunderstood.
Highly educated, well paid and tech-savvy: the profile of a typical Swiss client of a neobank is very much synonymous with the average Swiss banker. But while individual bankers swiftly adopt the Revolut service of cheap exchange rates for their shopping trips abroad, the industry as such has become all the more concerned. The speed with which Nikolay Storonsky succeeded in convincing a quarter of a million Swiss to open an account is breathtaking.
There is one thing that soothed their nerves though, and that is the inability of the British fintech to actually earn some money, five years after launching the financial service provider.
As a matter of fact, the losses have trebled over the past year. But to take this and conclude that Storonsky eventually will go bust is based on a fundamental misunderstanding.
Uber – Far From Profitable
Profits are a secondary consideration for a neo-bank such as Revolut. Their strategy is all about growth and growth at the detriment of the competition. In this, Revolut is following in the footsteps of other major digital disruptors. Amazon, the online trading company, made its founder Jeff Bezos the richest man on earth, yet returned losses for a dozen years. The first profit, in 2003, was a meager $35 million – on a turnover of $5 billion.
Facebook took five years to become profitable. Uber had a loss of $8.5 billion in 2019, ten years after its launch. And yet, these companies keep growing, following a strategy of long-term growth over short-term profit. Bezos once told rivals that their margin was his chance.
And where Amazon today goes, prices and margins are bound to drop. The giant will only reap the benefit once the old rivals have gone. So it's the disruption, stupid, one might conclude, using the dictum by famous U.S. adviser James Carville.
Failure of Wework
The system of the disruptor works as long as he can generate growth and prompt investors to stomp up new cash. The billion-dollar IPOs of Facebook and Uber showed how this works. Or sometimes not, as has been evidenced by the failure of the Wework IPO.
Revolut is going in this direction too. Growth: every tenth Swiss has used neobanking services at least once, a new study showed, and Revolut is the best-known among the group of new players. The company increased its income to £163 million from £58 million a year earlier. Staff numbers surged to 2,261 from 633 – a consequence of the company's acceptance that machines wouldn't suffice to provide the services to 12 million clients in 35 countries alone. Client assets increased £890 million to £2.3 billion.
Revolut has received huge amounts of money from investors. After the injection of £500, the bank became the most valuable European fintech and in July, it managed to attract a further $80 million. The unicorn-status isn't far off.
Fending Off Comes at a Price
The prices have started to come down in the business with Swiss payment cards. UBS and Credit Suisse have launched their own cheaper services, in a move that much reminds of Amazon rivals that also had to forego margin in a bid to keep pace.
Credit Suisse will launch its digital direct bank in the fall. But the Swiss players know all too well that growth in (cheaper) digital services will lead to lower profits and dividends. Their shareholders will also fend off any attempts to get more cash as this would dilute the value of their investments.
Storonsky, the former trader at Credit Suisse, has the banking rivals where he wants them. Revolut can only be its own downfall, if not a new rival is to emerge that holds an even bigger appeal to investors.
