How Revolut finally won the licence to unlock growth in UK and beyond
At the Revolut office in Canary Wharf, there are bright lights telling employees to "achieve their goals". However, the path for the start-up to become a fully licensed bank in their own market has been surprisingly sluggish.
Revolut shared exciting news on Thursday, revealing that regulators have officially approved the fintech company's UK banking licence. It took more than three years for this approval to be granted after Revolut first applied for it.
The approval for the license, which comes with certain limitations, comes after a lengthy battle between the UK's leading financial technology company and its regulators regarding Revolut's activities and internal procedures.
The permission will assist in backing a valuation that has the potential to reach $45bn if Revolut can successfully sell their current shares as planned. This achievement would position them as a strong contender for the title of the UK's third most valuable bank.
This will help Revolut to rival traditional banks by enhancing its services in the UK – and, importantly, pave the way for obtaining licenses in other important markets.
Obtaining a UK banking license usually takes about a year, as outlined by regulatory advice. However, Revolut's application faced delays due to various issues such as the exit of top managers, financial discrepancies, and uncertainties regarding its ownership setup.
"Revolut never planned to withdraw its application because they are determined," said a source familiar with the talks. "It was simply a deadlock for three years."
After a long wait, Revolut's co-founder and CEO, Nik Storonsky, finally received confirmation from the UK’s Prudential Regulation Authority that their application had been approved. This authority is responsible for overseeing the country’s banks, and they sent a letter to Revolut on Wednesday afternoon.
Leaders at Revolut have realized in private discussions that they made a mistake by not applying for a license when the company was smaller. Current and past employees have shared this information. Competitors like Monzo obtained their licenses when they had a smaller customer base, which Revolut's executives now believe helped them comply with regulatory requirements more easily.
Storonsky was very angry in May 2023 because he felt the UK was not helping businesses enough. He called the process of applying for a licence "long and tiring." Storonsky also said he didn't think it was worth it to list his company on the London Stock Exchange because there weren't enough buyers and sellers, it was hard to do business in the UK, and the tax and regulation system was tough.
A potential candidate who was asked to help with the permit request declined the offer because they were concerned about how Storonsky's personality might affect the company's connection with regulators, referring to him as "moody and unpredictable" - despite being very focused on creating high-quality products.
When Storonsky made a strong public statement in 2023, the young company had already enlisted Martin Gilbert, an experienced City professional, as chairman to assist in navigating its interactions with regulatory bodies. Additionally, the board featured Michael Sherwood, who previously held a high-ranking position at Goldman Sachs overseeing European operations.
However, the company has faced challenges in addressing doubts about its management practices, regulations, and adherence to rules, resulting in significant turnover in important roles. Last year, both the chief financial officer and the leader of the UK division that sought the license departed from the company.
In November, they brought on Francesca Carlesi, a previous fintech entrepreneur and former employee of Deutsche Bank, to oversee their operations in the United Kingdom.
This was all part of a bigger plan to change how people see Revolut. They wanted to move away from being seen as a fast-paced, risky start-up that only cared about getting big quickly. Instead, they wanted to show that they could be a mature, regulated bank that takes a more cautious approach to taking risks.
A former senior employee shared that Nik believed compliance shouldn't be done manually with people sitting at desks reviewing transactions and manually blocking accounts. He focused a lot on technology for compliance, which didn't align well with regulators.
"Revolut needed to change their approach... they needed to recruit additional staff, establish new procedures, and bring in more banking professionals."
Carlesi's hiring was seen as a good thing in the business world. The Italian executive would wear casual clothes to blend in with the tech company's culture, but was still very experienced in the financial industry, as noted by a regulatory expert who is familiar with her.
She has been dedicated to enhancing the bank's adherence atmosphere by establishing fresh authorization procedures for each new feature Revolut aims to introduce, as stated by another individual familiar with the decision.
The company has dealt with worries about its internal controls, which led the auditor BDO to caution that a large portion of its 2021 revenues "may be significantly incorrect". A positive audit report in its 2023 financial statements, released on schedule earlier this month for the first time in two years, was viewed as one of the last steps towards gaining the PRA's approval.
The financial reports revealed that Revolut had made a pre-tax profit of £438 million in 2023, a significant turnaround from the £25 million loss in 2022. Additionally, the company has successfully fulfilled the Bank of England's request to streamline its ownership structure, ending a dispute with SoftBank, a major Japanese investor.
Revolut is making a big effort to win over British politicians. During the UK's general election in June, Carlesi was among 50 company leaders who went to a Labour party event. At the event, Sir Keir Starmer and Rachel Reeves, who are now the prime minister and chancellor, talked with executives about their ideas for the economy and rules.
The company is expected to see new opportunities for growth after obtaining the license, surpassing former competitors like Monzo and Starling.
The permission given allows Revolut to compete with the largest banks in the UK by providing complete banking services such as mortgages. One of their main goals in the UK is to attract more customer deposits by offering interest rates, which will help finance loans to customers.
However, the UK license also eliminates a barrier that has traditionally hindered global growth.
Although Revolut has been able to function as a bank in the EU with a Lithuanian license, obtaining a license from its own regulatory body is expected to have a significant impact on regulators in countries where the company is looking to grow. This includes the United States and Australia, as reported by sources familiar with the situation.
Gilbert, the person in charge of managing assets at Revolut since 2020, shared with the Financial Times: "This is a significant move towards becoming a worldwide leading application and demonstrates that the UK remains a fantastic location to operate from due to its highly regarded regulators internationally."
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The choice could also support Revolut in explaining the $45 billion value it is aiming for in a future share offering. If it successfully sells $500 million worth of existing shares at that price, it will join the few fintech companies that have been able to raise their valuation from the high valuations seen in 2021, when it was valued at $33 billion.
With that market value, it would be close to Barclays in terms of being one of the UK's most valuable banks. It would be ranked third, only behind HSBC and Lloyds Banking Group, and ahead of NatWest.
Storonsky's personal investment in the company is estimated to be close to $8 billion, according to a study by the Financial Times using public records from August. Gilbert's ownership stake may be valued at over $850,000. Revolut chose not to provide a response regarding these numbers.
However, Revolut has not reached its goal just yet. It has received its banking license with certain limitations, which is a typical starting point as it works towards fulfilling all the necessary requirements to officially operate as a bank.
After the limitations, such as a £50,000 overall deposits cap, are removed and Revolut is able to function as a bank, its 9 million customers in the UK will be covered by the Financial Services Compensation Scheme. This means that deposits of up to £85,000 will be safeguarded in case the company goes bankrupt.
The fintech company has been informed that the typical timeline for the process is one year. According to a source familiar with the company's strategy, they intend to expedite the process and complete it sooner than that. However, there are others who have gone through the same process and are more doubtful about the company's ability to do so.
"It can be a complex and time-consuming process to prove that the company's control environment is effective. In my experience, most companies take at least a year to complete this task," explained Mark Mullen, CEO of Atom Bank.
Revolut is looking for a UK regulatory leader who will be responsible for effectively communicating with regulators and the business. They will also collaborate with the Revolut UK board and executives to make sure regulatory changes are taken into account when making decisions. This information comes from job postings on LinkedIn.
The company is optimistic that obtaining a UK license will help jumpstart its efforts to gain market share from the traditional banks in the UK.
Edward Firth, an expert at Keefe, Bruyette & Woods, mentioned that the fintech company could pose a challenge to other online banks and established institutions with customers who are not very active and could be attracted by more competitive interest rates and cashback deals.
"I believe they will now begin to rival each other," he stated.
Further information provided by George Steer in London.
