Revolut looks like the Neobank that is pulling away from the pack.
This has led to predictable anti Revolut backlash focussed on 5 concerns:
1. Revolut are losing money (£107 million in 2019, from £33 million in 2018. Read this from Zennon Kapron for a good analysis of their financials. Revolut’s financial strategy seems to be deferred profitability, because revenues (£163 million) and deposits (£2.3 billion) are growing strongly. Revolut likes to remind us that Amazon took 14 years to reach profitability (and Spotify took 10 years and Airbnb took 8 years). They are setting an expectation of 5 years (like Facebook). Revolut’s 2020 numbers will be critical as that is five years from its founding in 2015. If Revolut can pull that off (i.e make a profit in 2020), big banks should be very worried.
2. Revolut support could be improved. This is despite headcount rising from 633 to 2,261. So they can afford to offer great customer support. This is one area where Revolut can learn from Automattic.
3. Pandemic has slowed the globetrotting that made Revolut’s pre-paid debit cards popular. Revolut is looking for new revenue drivers. The one use case that Revolut is good at that does NOT involve travel is how they enable parents to easily manage accounts for their children. This could be a big growth driver. Revolut’s 2020 numbers will be critical to see if they are successfully executing on this. The functionality is not simple, so both UI and support are critical.
4. Revolut have been rough on their employees. They have made some defensive moves to counter this, such as executive pay cuts and enabling employees to exchange some salary for shares. However Revolut could go on the offensive by learning from Automattic how to do work from home well; Automattic pioneered work from home based on the simple idea that talent is evenly distributed but opportunity is not. Work from home done badly is really really bad, but work from home done well is great. Revolut should study Automattic to figure out how to do it well.
5. Revolut is not a “real” bank. Revolut is regulated by FCA in UK as an e-money institution not a bank; this means that money held in Revolut accounts are not protected by government insurance. Revolut is regulated as a bank in Lithuania and is expanding its banking footprint in central and Eastern Europe. Revolut is applying for a banking license in the UK and developing lending products for the French market and expanding into the US market.
Revolut looks like it is following the go big or go home strategy. They want to be a big global bank, regulated in multiple jurisdictions. Which means that big global banks such as HSBC should be worried.
Revolut claims to be adequately capitalized for this challenge. According to Martin Gilbert, non-executive chairman, Revolut has “enough capital to complete the journey and continue to expand the business.” Revolut has raised more than US$916 million (of which US$580 million was in 2020).
Users, wherever they are, care about three things when looking at a bank, whether Legacy or Neo:
1. Is my cash safe? Fund security is driven by a) regulation (eg will deposits be insured) and b) cybersecurity (to prevent your cash being hacked). The latter is also a UI issue as you have to balance ease of use with security. UI is also a customer support issue because no matter how easy to use you make it, some people will need help.
2. How much will I pay in fees? When one of our children was born we opened a bank account with the aim of teaching our child about money. Within a few years, the small opening balance was almost zero due to fees. We scrapped the lesson about the value of compounding and closed the account. Revolut, with far lower costs, should be able to afford to be disruptive on fees.
3. How easy is it to use? Again, that nice balance of UI and support is critical. Everybody talks about UI, but I want to focus on the support question. If you want to see how a mass market, low cost product provides excellent support, become an Automattic customer. Speaking from experience (Daily Fintech uses wordpress.com from Automattic), I can vouch that it is excellent (and low cost). Great support can do 3 things for you:
- turn your customers into raving fans. I tell everybody how great Automattic is and they don’t pay me a dime to do so. Their UI is ho hum, but their support is superb.
- help you up-sell from inbound. If a customer calls/texts you and you solve their problem they will be in a receptive mood to hear about some relevant premium service.
- help you improve your UI. If you get lots of calls/texts about that feature your developers say is superb – guess what, it could be improved!
Anybody who has worked in customer support whether insourced or outsourced, onshore or offshore will vouch for the above.
Revolut is a tiny minnow compared to the HSBC whale, which has around 3,900 offices in 65 countries and 38 million customers. However remember that disruption usually comes from low cost competitors that look ridiculously small at first.
HSBC is probably now looking over their shoulder at both Revolut and Facebook Libra. The reason is that both enable low cost instant cross border payments. Paying cross border from one HSBC account to another is just two tiny entries in the HSBC core banking system. As HSBC has 4.5% of the massive Interbank FX market, that is a very big deal. One company that is even more global than HSBC is Facebook who can do the same thing if regulators allow Libra.
There are 3 boxers in the banking ring:
- Regulated Neobanks such as Revolut.
- Regulated Legacy Banks such as all the ones we use today.
- Unregulated Crypto “Banks”. They may use the word bank in their marketing but won’t be regulated or what we normally think of as banks but will provide banking type services. Will get traction first among the “unbanked”. Maybe an unregulated firm will do what Facebook is trying to do.
It looks like Facebook wants to be regulated like a bank. If a Regulated Legacy Bank sees both Revolut and Facebook in their rear view mirror, they should be worried.
Grab a big bag of popcorn folks, this will be a long epic!
Revolut is currently in the stage of building value. At some point the founders, management and investors will want to go to the pay window and get liquidity aka cash aka exit. Everything up to that point is only valuable on paper. Some may be able and willing to cash in early but most will want to find a liquid market to optimise value. Which is the subject of next week’s post on the 3 corner fight between Security Tokens, NASDAQ/NYSE and Regional Exchanges.
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