Revolut has struggled to break into mainstream banking amid accounting uncertainties, failing to win a UK banking licence. But with an EU licence, allowing it to participate in the ECB’s deposit guarantee scheme, and a new Spanish IBAN, with which it hopes to grow its two million customer base there even faster, the neo-bank is no doubt looking to tap into more profitable and reliable business areas.
In this article, we take a brief look at Revolut’s history and assess its state of health against our holistic measures of Culture, Business Model and Compliance, ending our detailed, forward-looking analysis with brief conclusions and what we call the ACG Sniff Test, a more instinctive judgement that would have helped detect the rot behind the clean bill of health at companies from Enron to Wirecard.
Nikolay Storonsky, Russian born but a British national, founded Revolut with partner and Chief Technology Officer, Ukrainian born Vlad Yatsenko, in 2015, the same year as Monzo was created, and one year after Starling.
These neo-banks aimed to offer bank customers a simple, cheap service using the latest mobile technology, where an account could be set up quickly and the basic transactions executed super-efficiently. Revolut kicked off in London with a pre-paid debit card aimed at offering cheap foreign exchange for frequent travellers. Its founder’s ambition was described as wanting “to create a super-app that would provide all the financial services a customer might need in a single place”.
Revolut’s website lists what it considers the milestones in its history, commencing with raising an initial $15mn in 2016, and a further $66mn in 2017, when it launched Revolut Business, Revolut Premium and Crypto Trading in the European Economic Area. In 2018, it raised a further $250mn and was given banking status in Lithuania. In 2019, it expanded into Australia and Singapore, launched Trading and by then had acquired 10mn customers, and in 2020 it raised $580mn and launched in the USA and Japan, while introducing banking services in Lithuania and Poland. In 2021 it raised a further $800mn and launched a new service, On-Demand-Pay, enabling customers to draw on anticipated remuneration. Currently it boasts 30+mn personal users and 500k+ business users.
After its last fund-raising, led by SoftBank’s Vision Fund and American investment firm Tiger Global Management, Revolut had achieved a market value of $33bn and was worth more than British bank NatWest, notwithstanding the limited range of services it offered or the comparative size of the asset bases. However, in recent years its reputation has been tarnished by the late filing of its statutory accounts, which has called into question the accuracy of its published trading figures, and earlier this year its value was assessed as having fallen by nearly 50%.
Holistic Corporate Governance Assessment
It is perhaps a good time to examine Revolut’s performance holistically under our three broad categories of Culture, Business Model and Compliance, and to see what guide this may give us as to the road ahead for this hard-charging novo-bank.
We consider this under three headings:
There has been no indication so far of any systemic unethical approach to the business. Reports of the release of details of a former customer, with an exchange in publicly accessible media about the reason for termination of the account and disclosure of the name of the customer, probably speak to what has been described as an immaturity in a rapidly expanding organisation. This is perhaps also indicated by the appointment in February 2022 of a dog as chief pet officer.
Social behaviour and practices 2/5
Here we have a more mixed result. The CEO, Nik Storonsky, is seen as a very hard-working and driven leader, obsessed with data, with a hands-on approach. He is described as demonstrating less in the way of sales skills and showmanship than some more well-known tech entrepreneurs. This leadership is felt to have created, especially in the early days, a culture which was described as exhausting.
The internal culture has been self-described as brutally frank, and giving honest feedback in a way that might hurt sometimes. The brutal culture is perhaps exemplified by the execution in Spring 2022 of Project Prism, a cost-cutting review, in which job offers to graduates were revoked within days of the offers being made.
Staff turnover has been reported as sizeable, with staff staying in jobs for shorter periods than at neobank rivals Starling & Monzo; this denied by Revolut.
Insiders point to a habit of solo decision making by Nik Storonsky, and what might be seen as disruptive appointments of young graduates to senior divisional roles to make an impact. It has been suggested that the Board is seen as a hindrance by executives, though the appointment of Martin Gilbert, founder of Aberdeen Asset Management, as chair was surely to bring his experience to give the Board a significant impact both internally and externally.
Revolut has achieved considerable success with its crypto trading app, and to encourage potential customers, it provided what it called educational lessons on crypto basics so beginner traders could learn before trading. This has been criticised as providing no real educational materials, nor a demo trading account. And the Financial Times has dismissed this “learn and earn” as hardly what the regulator had in mind – answering questions correctly to earn Polkadot tokens.
There has been comment on a “cultural review” by the FCA which has not been acknowledged by the FCA, and Revolut simply described a constructive relationship with the FCA.
Environmental impact N/A
As a fintech business, providing a limited amount of banking lending, Revolut can’t be seen as having any significant environmental impact at this stage.
We assess the continuing validity of Revolut’s business model under the following six headings:
Continuing appropriateness of the Goal 3/5
The founder’s expressed goal was to provide all the financial services that a customer might need, commencing with a debit card. It has progressively rolled out additional services, on a global basis, though its failure to get a full banking licence in the UK, its biggest market, is a severe limitation on its ambition to provide lending in its most important target markets. Arguably, the delay it is experiencing with the UK regulator is a direct result of cultural issues, compounded by inadequacies of internal controls resulting from excessive speed of growth.
The big contribution from crypto trading, which helped early on, then collapsed, only to reappear more recently, and currently facing collapse again, must also put a question mark over the balance of its goals, particularly since it recently closed its crypto trading service to US customers, following regulatory changes.
Finally, launching payday loans, which it describes instead as providing early access to accrued earnings, in mid-2021, is seen as risky after the demise of payday loans provider Wonga which collapsed in 2018. After big early losses, Wonga had developed a sophisticated algorithm to reduce defaults, but charged big fees to maintain profitability and went into administration after the FCA tightened lending rules. Revolut apparently charges a much smaller fee than Wonga did, but payday loans are not popular with the regulator.
Strategy feasibility 2/5
At this point, the jury must be out on whether its full-service global goal is achievable given its strategic approach, which is to grow its business generally as fast as possible in as many regions as possible. This compares with the much more sedate pace of its UK rivals, Starling and Monzo, both of which have gained their banking licences over a similar period of time.
It has recently faced a problem with its very important investor, SoftBank, after the regulator indicated that it must simplify its share structure as a condition of getting its banking licence. The PRA wants it to collapse its six classes of shares into one, so it faced a demand from SoftBank to grant it twice its current amount of common stock to make up for the prospective loss of preferential rights. Following negotiations, agreement now appears to have been reached on collapsing the six classes of shares without issuing any new top-up shares to Softbank.
The PRA is also asking for more technical expertise on the board, presumably to guide a feasible and prudentially acceptable strategy.
And in the past few months, two investors have written down the value of their investment in Revolut by some 40%, following the delay in obtaining the banking licence.
Organisation structure 3/5
A former executive described it as an organisation which had grown very fast and didn’t have a lot of people with the necessary financial services and regulator experience. An indication of instability in the organisation is the recent loss of a significant number of key people.
In February 2022 it was reported that there was still no Chief Investment Officer three months after the previous one left, having spent only eight months in post. And later in the year, five executives resigned, including the Chief Risk Officer, the UK Head of Regulatory Compliance, the UK Money Laundering Reporting Officer, and the global heads of regulatory compliance.
In the current year, the CEO at RevolutNewCo UK left after three years, and the CFO left after two years. And most recently the Chief of Staff and Head of Banking Products for the UK entity announced that he was leaving.
Internet reports on Revolut’s help service suggest that it has a great chatbot and a useful FAQ section, but phone support offers only pre-recorded answers, while any live chat is slow, and responses aren’t always satisfactory.
The Financial Ombudsman Service shows Revolut has the highest number of complaints among its peers – five times that of Wise, the second worst scorer of the e-money firms.
Revolut will shortly be subject to forthcoming additional regulation when the Consumer Duty Regime comes into force. The FCA’s website says that the Duty sets higher standards of consumer protection for financial services customers and says the new Rules regarding the Duty mean you should get:
- the support you need, when you need it
- communications you understand
- products and services that meet your needs and offer fair value.
Its Non-Handbook Guidance for Firms on the Consumer Duty says it’s closely monitoring how firms are putting their new rules into place, and will take action against those that aren’t following them.
Some of the examples of what it quotes as “Poor Practice” could have been taken from the criticisms of Revolut’s customer support mentioned above.
How will this affect Revolut’s organisation and costs?
Resource adequacy 3/5
Financially, Revolut should be comfortable, having recently raised large sums from investors. And the trading results finally released show a profit for 2021 of £26mn against a loss of £168mn the previous year. Revenues are up from £222mn to £636mn in 2021.
The results for 2022 are late once more, but we are assured that 2022 was a good year, with revenues exceeding £850mn, but no word on profits, hence no indication of the cash contribution.
The personnel skills would still appear to be lagging operational requirements from the comments regarding service levels, inadequate controls and late filing of accounts.
Effective systems of control and risk management 2/5
Here again, we see a less than satisfactory situation. It has been suggested in connection with culture that the obsessive focus on meeting targets could encourage excessive risk-taking.
Particular incidents include the following:
In 2018 Revolut discovered what was described as a spate of suspected money-laundering issues which it reported to the law enforcement authorities and the FCA. Next year it concluded that it had “erroneously” switched off an automated system for flagging potential money laundering for several months in 2018.
As mentioned above, in 2022, it lost its Chief Risk Officer, UK Head of Regulatory Compliance, UK Money Laundering Reporting Officer, and global heads of regulatory compliance, and was reported as currently advertising for 27 positions across risk, compliance and audit, plus 80 positions in the Support and FinCrime division.
Later in 2022, it was hit by a cyber-attack affecting 50,000 customers, and in 2023, there was the revelation that Revolut had lost $23mn in funds stolen through weakness in the payments system in 2021 – 2022, a flaw which wasn’t corrected until Spring 2022.
And just this month, it is reported that monies have allegedly been released recently from accounts flagged by the National Crime Agency as suspicious.
The CFO, before he resigned, said that Revolut’s IT systems had failed to keep up with the pace of growth.
They are now under pressure from auditors, BDO, to improve internal controls.
Accountability and transparency 1/5
In July 2021, after announcing losses of £168m for 2020, the CFO said it had been strongly profitable in the first quarter of 2021. When the results were eventually released, the declared profit was a mere £26mn, and that was after the auditors had qualified the accounts, including a statement that the design of Revolut’s IT systems meant there was a risk that the bulk of its 2021 revenues were materially misstated. It had been unable to verify £477mn of revenues.
In March 2023, Revolut issued a statement that BDO’s report gave the financial statements a clean bill of health and described the accounts as providing a true and fair view – this prompted no comment from BDO, but astonishment from other commentators.
Finally, in November 2021 Nik Storonsky said that the company had applied for a UK banking licence and expected to get it early in 2022. And in March 2023, there was a statement from the CFO that the banking licence was coming very soon.
It still hasn’t been received in September 2023.
These elements above don’t speak well for a culture of openness and transparency.
Here we look at four aspects of compliance:
Statutory and legal 3/5
As far as we can tell, Revolut has complied with the requirements of the Companies Act except regarding the late filing of its accounts, two years running.
The CEO’s comment about the late filing of the 2021 accounts was that it was “technical reasons” that prevented it from filing on time, which have since been resolved and so it will not happen again. But it has happened again.
Moreover, Revolut NewCo UK, the vehicle intended to house the UK banking licence is reported as having been overdue in filing its accounts since June.
Company constitution 4/5
Again, no-one has raised issues about Revolut stepping outside the rules contained in its Memorandum and Articles, except for the issue raised by the PRA which prompts questions over the successive share issues, presumably introducing different class rights.
Corporate governance codes N/A
Being a private company, Revolut isn’t subject to the same degree of compliance, though the expectation on the part of the FRC would presumably be that Revolut , as an extremely important company, would take note of the Wates Corporate Governance Principles for Large Private Companies.
However, there doesn’t seem to have been any comment on Revolut’s performance regarding the Corporate Governance Code.
Industry regulation 3/5
Currently, Revolut has been granted most of the licences it has sought, except the key one allowing it to call itself a bank in the UK, despite waiting twice as long as the norm.
But in late 2022, it was censured by the Bank of Lithuania for its failure to submit accounts on time and fined €70K. It was also criticised for failings in handling of customer complaints, including cases of “incomplete, unsubstantiated answers” and missed deadlines.
It is now, apparently, big enough in Europe to merit probable regulatory review by the ECB, which is likely to lead to more heavy-handed supervision – “comprehensive assessment”. This is likely to lead to a requirement for a big investment in compliance staff and related costs. Will it happen?
This is a hard-driving, super ambitious company, with a founder CEO who has all the confidence in his vision and self-belief one would expect. But the key requirement is for him to support himself with a suitable team of competent and experienced people, and a board which performs its role as required by the Companies Act.
Based on the analysis above, one has to question the performance of the board in allowing the CEO to run well beyond its control.
Considering the performance of Revolut holistically, its chances of achieving Nik Storonshy’s current goals look at best 50/50. And if the uncertainty over its trading results persists, the chances of its blowing up look about the same.
The issues raised by the auditors regarding controls and risk management, partly at the behest of their own regulator, are definitely worrying. One has to hope that the uncertainty regarding a very significant part of the revenues doesn’t morph into the situation that EY faced with Wirecard.
The caution displayed by the regulator suggests that significant changes may be required to the systems and key personnel before a bank licence is granted. The possibility of Revolut leaving the UK for the USA to get a listing seems remote as it would likely need a UK banking licence before it could be accepted by the US banking authorities, particularly after their bruising experience with SVB and its peers earlier this year.
ACG Sniff Test
Shades of Wirecard?