Revolut’s banking licence won’t silence doubters
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Getting a British banking license is not usually very exciting. In the last ten years, the Prudential Regulation Authority has given out around 40 licenses to new banks like Starling, Monzo, and OakNorth.
However, the fintech company Revolut, based in London, has been striving to make it onto the list for over three years. Finally, its goal has been accomplished. However, simply achieving this milestone will not be sufficient to dispel all uncertainties.
Revolut is facing challenges in obtaining a UK banking licence, which can be attributed to its rapid expansion. The company's revenues have been increasing significantly, almost reaching over $2bn last year. Issues with delays in its 2021 and 2022 accounts, due to concerns raised by auditors regarding revenue verification, have led regulators to proceed with caution. Additionally, a slowdown in financial markets has led Revolut's private investors to lower their valuation of the company.
Obtaining its banking license is a big achievement. Another positive sign is the sale of $500 million in employee stock, showing that confidence is increasing. With a reported value of over $40 billion, this is a major increase from the $33 billion valuation Revolut had in a private funding round in 2021.
The company is very optimistic about its future financial projections. It believes it can achieve revenues of $9 billion by the end of 2026. This would mean that revenue growth would need to increase from the 55 percent expected by Revolut this year, essentially doubling within the next two years.
If the company lives up to its big promises, investors who bought shares in the recent sale aren't doing too bad. If half of the growth needed to reach its 2026 goal happens next year and profits stay the same, then a $40 billion valuation means it's valued at 25 times its earnings in 2025. Wise in the UK and Nu in Brazil both have valuations of 22 times their 2025 earnings.
The issue is that Revolut's plans for growth seem very ambitious, especially considering they now have a banking license. This is even more concerning given the current trend of interest rates decreasing, as interest income made up more than 25% of their revenue last year.
Revolut may need to compromise on making a profit in order to reach its goal of increasing revenue. In the previous year, the company invested £241 million in advertising, which is double the amount spent in 2022. This equates to around £20 per new customer, which is higher than the estimated £7 per customer spent by Wise and Nu in 2023.
Businesses often find it difficult to achieve remarkable revenue growth without sacrificing profits and upsetting shareholders. Revolut's ambitious goals make it vulnerable to facing the same challenge.
