From challenger to mainstay: Revolut's licence and the closing gap in UK banking

Speaker A: This is the fstech podcast. Hello and welcome to this FSTECH podcast. I'm Isaac Hansen, senior reporter at Fstech. On 11 March, Revolut was granted a full UK banking license after a four year process. Co founder UH and chief executive of Revolut, Nick Staronsky described the decision as the culmination of a long term strategic priority. This is not its first banking license globally. It attained status in the EU five years ago and launched full banking operations in Mexico in January of this year. But the UK is Revolut's home market and the license should help to quell long standing concerns over issues including delayed account filings. It now joins the ranks of competitive neobanks like Monzo and Starling in being able to offer loans backed by customer deposits. But the $75 billion fintech has not yet announced plans to offer them in the uk. This raises a key question. If Revolut could already offer lending without a UK banking license, why go through the long and complex process of becoming a fully regulated bank? Have changes in the market, company strategy or regulatory expectations made this m move necessary? And what will it mean for Revolut's flexibility, costs and competitive position going forward? We'll explore these issues today with Christoph Stegmaier, a senior partner in consultancy Simon Kuche's global banking practice with over 20 years of experience in financial services. Christoph, thank you for joining me. To start us off with some scene setting, let's look at the process behind Revolut's UK banking license. Why did the process take so long? Was it regulatory concerns, internal readiness or shifting expectations from regulators?

Speaker B: Well first of all thanks for having me. Uh, obviously an exciting topic for everyone that's following the uh, neo banking landscape. Um, let me, let me sort of explore that in uh, in, in the next couple of, of minutes. So uh, it's, it's taken a long time uh, for, for getting the license but then uh, it's also, it's also a process that if you think back for, for many, many years banks did not file for new banking licenses anymore. So I remember the times in the 2010-2020 uh, there were news around so that the first license being granted in decades in the UK and other markets. So it's not necessarily a process that was a standard process. Now Revolut obviously over the course of time, while they did apply for the license now uh, Revolut is a completely different bank than it was I think when they started in 2021. So back then I do remember if we ran a study at Simon Kutcher for 2022 around the neobanks globally. The big message there was really no one is profitable. I think it was less than 5% of the neobanks that were profitable. It was a model that wasn't proven. Uh, it was certainly being received with a lot of skepticism from the regulators Nowadays, uh, Nail, uh, banks are the fastest growing banks globally. Revolut and Nubank I think are the two largest or fastest growing banks global. So we're now dealing with um, an elephant, not a tiny ant anymore that's running and trying to make uh, their cause. So uh, I think that's part of it because uh, Revolut has moved so quickly. Obviously uh, that regulatory process also had to shift over time. And then secondly what I mentioned before, it's just nothing where the regulator has a lot of uh, had a lot of uh, experience. Yes, there's Monzo, there's Starling, uh, but it's just a relatively new process. Hence it took longer than expected.

Speaker A: Sure, yeah. And what was it in your opinion that finally tipped the scales into granting the license after, as you say, a really quite lengthy process?

Speaker B: Look, uh, it's always hard to be to uh, speaking for the regulator and what, what took so long, I think there is now a lot of pressure on regulators globally also of uh, um, of that model that has already reached millions and millions of customers of making, of making their business, uh, a regulated one. Uh, ultimately uh, there's always a risk involved to the regulator granting a license. Uh, but in that particular case, if you have uh, it's hard to keep track of. But if you had 50 million customers globally, uh, then obviously having a sound regulatory approval is also important and important sign for the end customer. So uh, I think there's pressure on the regulator. Uh, and I think it's just a natural process. It already took longer than it should have taken to get to a decision eventually. Uh, as you mentioned before, it's not the first license that Revolut was granted. They had their Lithuanian license for quite some time. They have other licenses in other parts of the world. More will follow. Uh, but at a certain stage I think you would as a UK regulator, if you don't give that license, you're probably uh, the odd one out. While at the beginning it was a bit the, the other way around. Right. Who would, who would give a Neobanker license now it's more of a uh, more of a standard procedure I think. So it was about time to do that.

Speaker A: Yeah, no, definitely. And I, I think that point you were making earlier about how sort of standard neo banking has become and how large these neobanks have become is really at the heart of the discussion that we're having today. I mean opinions have differed I think on whether actually getting a banking license is positive for Revolut.

Speaker B: Right.

Speaker A: I mean Barclay's chief executive uh, Venkata Krishnan has previously told the Financial Times that Revolut benefited from operating without a full license, um, due to the sort of lower level of regulatory scrutiny that it faced. But obviously Stronsky disagrees and Revolut as a company clearly disagrees. So I mean you talked about customer uh, trust. I mean was this move necessary for longer term expansion in the uk and does it risk diluting the sort of original agility that gave Revolut an edge over high street banks?

Speaker B: I'd like to answer that in two parts. It's really, really two important elements. Let's maybe start with the latter one. The agility point. Uh, what one has to understand whether or not a company is agile and for, for lack of a better term. But let's, let's stick to the, to the agile term here, uh, is not so much a question of whether you're regulated or not. It's a DNA thing. We work um, we work in, and I personally work a lot with both Fintechs and Neopax. But on the other side also large, large uh, financial institutions, there's a very different way of doing things. Uh, there's a very different way of launching new products, of testing new products. Uh, the big portion of agility really comes in the way of how quickly a Revolut can find the ideas, bring the ideas into motion. Have uh, a tech team that's actually building this. Obviously a lot of the tech is built in house at, at Revolut versus in, in large institutions it is not. And then have a time to market it's probably closer to six to 12 months for really large ideas versus in, in, in large institution that goes into the, into the multiple years. If you want to launch a big, a big initiative, that type of agility, I don't see a reason why having a license should impact that type of agility. Of course when you're dealing with certain products, uh, when you're dealing with kyc, AML and so on processes you have more scrutiny and you have to probably do maybe one extra loop in that but it doesn't change the DNA. So while it has some impact, my, my view is it's not gonna, it's not gonna change dramatically the agility that a Revolut should have. Uh, okay, yeah first part of your question or now second part is around whether or not that was actually needed. I think it depends on how you define needed. Obviously Revolo was doing quite well. They've announced their annual report just uh, uh, uh, very, very recently. Uh and what you see is a huge jump in profitability is a huge jump in revenues. Obviously in multiple countries they do have a license so they benefit from that. But even without a license, uh, I think it's important to understand the economics of Revolut which is very different than the economics of most neobanks. Revolut today is a commission or fee based uh, led model where I think interest income is somewhere between 20 to 25% of the entire income. The industry on their banking usually is already at 60, 70, sometimes even 80% of interest income. Uh I don't think maybe with the exception of Wise that has a, an effects lab business and therefore also commission led business model. Uh there is a, a clear look alike to Revolut around making uh, revenues in the range of 4, 5, 6 billion uh, of, of of dollars or, or, or or pounds and uh, having a percentage of commission fee income that's in the range of 70 to 80%. That's just Revolut now and that, and that kind of then spins. Do they have to get a license? Well it's just a huge opportunity because they're currently, you can say they're over penetrated on commission fee income or you could say they're underpenetrated on uh net interest income. And what the license will do is it'll just make life much easier around growing deposits, around selling loans, building a balance sheet and managing the profitability of that balance sheet. Um and that's why I think necessary probably not. But is it a big opportunity? Probably yes.

Speaker A: Sure. Yeah. And I mean I guess more broadly as you say, I mean other neobanks maybe look even more like your high street bank in terms of their income spread. Um and you know they're getting up to customer numbers that are very similar. I mean Revolut has just over 13 million UK customers at the time of recording which puts it just behind nationwide. So it's in the sort of top 10 easily, probably top five or six largest banks in terms of customers. It does have lower deposits as you said. These banks are starting to look, these neo banks as we call them are starting to look increasingly similar to their brick and mortar cousins. What's driving that convergence and does A banking license further reduce the differentiation of neobanks from their older more established counterparts.

Speaker B: It's probably worth sort of going back in time for when the neobanks launched initially what was the promise of the neobanks? It was mostly we'll do many said we're not a bank where uh, we want to do things differently, we want to have better ux. I uh think the initial idea was for most of the neo banks make uh, money out of a better transaction account. Interchange fees was, was a big part of the play for, for many neo banks on purpose they stayed away from building a balance sheet. Not everyone but, but at least in, in the UK and continental Europe that was the big, the big play. Uh part of it was driven by most of these neobanks being um, owned and funded by VCs. VCs. What they don't like is volatility. What they don't like necessarily is a big balance sheet. What they do like is recurring revenues. Hence most of the neobanks went in uh with a mindset let's create recurring revenues, let's stay away as much as we can from, from interest revenues. What happened is that over the course of the first five, six, seven years of neobanks many of them were not profitable. The reason being it turned out that very very few were able to make enough money out of commission income uh in order to uh, to grow profitably. Uh it was not difficult to grow, it was much more difficult to grow profitably. So fast forward to today. There uh, has been a change in the, in the, in the mindset in the industry. Interest income is well might not be as, as positive seen as, as commission income but it's still, it's still profitability and those near banks need that uh, element for, for profitability. So uh, I think that's, that's sort of where we, we've seen that big shift in in mindset and that's where we've seen uh essentially also it's just a, the consequence of why uh, why Revolut is now sort of uh, uh taking the license. It will probably do the next step then uh, and then getting a bit closer to being a traditional bank from a product mindset. Now again second part of the answer here is uh the what what is being offered might be similar. How it is being offered will still differ significantly. And uh, we might talk a bit about the new bets framework of Revolut that has been, a lot has been written about it of how Revolut is able to generate new ideas and Bring them to market quickly. Obviously there's a lot, I think they call it banking and beyond. Uh, my memory serves me well. Uh, they do, yeah. It is certainly more than the traditional banks but it is grounded in the traditional set of financial products. You take money, you lend it out at a higher, at a higher rate. You offer investments, uh, you offer payments and, and transactions. That's what a bank is all about. Uh, that's where the course, I think yes, the core is the same but how it's being offered, how uh, innovation is coming into play, the UX of it all those things are still dramatically different. So I, I wouldn't call it, I uh, wouldn't call it converging. I would just say the foundation remains a bank. Everything else is still quite different.

Speaker A: I think it's very interesting that you talk about how things are offered and obviously there is a large difference. One thing that I'm particularly interested in is the UK's ring fencing laws. Revolut as you say in their most recent earnings report, say that they now have over £50 billion in customer balances. It doesn't break these down by country, but it must at least put them relatively close to the 25 billion retail deposit limit in the UK. That would require them to ring fence their retail activities if it is required to do so. And presumably we have to assume that they intend to get to that number sooner rather than later. What does that mean for the, and more part of its banking operations?

Speaker B: So I don't have data either around the geographical split of deposits. I think based on the limited, the restricted license that uh, Revolut had in the UK and the limits uh, they had on a customer level around the, the, the level of deposits they were able to gather. Um, that's probably right. And maybe they're still, still a bit away from, from that uh, from that boundary. I think there is an important part here in terms of deposit gathering that is linked to Revolut's push um, for being more a bank for affluent or even private banking customers. Um, that's obviously been, been public uh, for a while now around Revolution. Trying to build a muscle in that space. Um, I'll, I'll bring some, some data here. Um, that's probably interesting to uh, to observe. So um, globally and the UK is very similar to that, but globally we've seen that around two out of five new bank accounts are being opened now in nail banks. So roughly 40% of the acquisition share. Um, Revolut just announced that their numbers in some of the countries they they uh, claim about one out of three new accounts being opened, being uh, a revolute account. So pretty similar uh, data than the one that, that we were able to gather at the same time. We've looked into the total uh, retail banking revenues globally and it's only about 5% sit with neobanks, which means nail banks have been very successful in acquiring, they're quite successful in keeping and growing customers. But uh, they haven't yet uh, been able to, to tap into some of the largest revenue pools of retail banking. Where do they sit? Well, they sit with mortgages, they sit with private banking. Affluent relationships, uh, that's what is so important also around having a banking license, having no limits around the, the level of deposits that you can gather so you can, in a, uh, in a market like uk uh, my, my gut feel is that these two things are very much related around pushing more into the uh, private banking space, uh, and the affluent space while having a license, which will, which will facilitate that process significantly. Sure.

Speaker A: Okay, so you, you think that in some ways the ring fencing will actually benefit them on the business model that they're intending to pursue in the uk?

Speaker B: I presume so. Um, it's uh, it's, it's a bit harder sort of to uh, to, to understand exactly sort of what's, what's going on behind in the mines here. But uh, I would think so, yes, sure, absolutely.

Speaker A: To jump across the pond for a minute. Obviously you're based in the US Uh and Revolut has also applied for a US banking license this month. Now in, uh, your neobanking report, you detail um, a fragmented market for neobanks in the United States with many homegrown providers facing a long path to profitability, certainly compared to Europe. Um, will Revolut's acquisition of a UK banking license help its prospects as it moves over into the US or does it actually expose them to sort of similar structural challenges that the incumbents in the US already face?

Speaker B: First of all, I'm shying away from predicting the outcome of regulatory processes that's obviously, uh, you never know what's going to come out of those. But there's obviously a precedent of Nubank having uh, successfully applied for a charter in the U.S. there is a neobank in the U.S. with a charter, uh, which is Borrow Bank. So there have been some successful cases. It seems that while for many, many years it was extremely difficult getting licenses in the US this now seems to be a more feasible path. I personally believe that the neo banking landscape in the US is Really ripe for disruption. The difference here is that in uh, the US there's still significant interchange fees to be gathered. Hence many neobanks focused on this part. Uh, they didn't focus more on the overall building a balance sheet part. Outcome is that uh, the neobanks in the US have not been as successful as they have been globally. So the market is still, as I said, ripe for disruption and for new challenges. Obviously Revolut has been in the country for a while. I think it hasn't been as growing, uh, as fast as it has grown in other, in other parts of the world, partially because of the banking, ah, license topic. But it's such a huge market, it has such a big potential. I'm not surprised that Revolut is pushing this market here. Now your question was around, are the prospects now better because of the UK license? Again, my, my humble opinion is probably yes. Uh, but every regulator will take their own, uh, decisions. Obviously a Bank, again with 50 billion clients plus with licenses in many different countries should have a better, a better chance of, of getting the license. But again, uh, let's, let's wait and see what comes out. Assuming they will get the license and assuming they will bring some of their core functionalities into the US market. Um, I'm, I'm quite uh, optimistic for uh, Revolut, that there is a lot of ground to be taken. It's a, it's still a pretty living in the US it's still a market where you see a branch at every corner. Branches uh, are actually growing in some parts. Uh, it's still some parts of the transactions. I mean don't try to, don't try to, to pay your rent in, in the US at some stage you sometimes you still have to walk into a branch, get a check, walk into another branch, leave the check. These type of things still happen, uh, on this side of the pond. So uh, yes, uh, there are things to be disrupted.

Speaker A: Yeah, I mean absolutely. That's definitely a very different landscape to the one in the UK and the rest of Europe looking forward not only to the US but more generally in the neobanking landscape. If this convergence continues to take place between neobanks and uh, high street banks, or if they converge more than perhaps we're seeing right now, is there a sort of new wave of competitor banks that will come into being that you think can differentiate themselves or are we in a sort of restabilization period following, as you say, what was quite a major upheaval with this initial wave of neobanks, offered something New, I think it's the latter.

Speaker B: Uh, I don't see a new wave of new, uh, players coming in without a license. It's just a natural, just a natural trajectory of, of neobanks then moving into having a license and being a little bit more like traditional banks. Because again, the thing that is different about neobanks is not necessarily the type of products they play. Yes, there's a bit of an EIM and there's Revolut has obviously some additional products. Others like nubank have additional products as well. Um, at the core it's still a bank. At the core it's better to have a license than not to have a license. Uh, and again, as I said earlier, I don't think it'll come, It'll come with more regulatory scrutiny, it'll come with more complexity for sure, but I don't think it's going to change the DNA. And it's extremely difficult of starting from scratch now and launching something new and trying to catch up. Because whenever you launch something new you have to have significant white space to disrupt the markets. And that white space I don't see at the moment. Uh, I still see an opportunity for traditional banks launching their speedboats because what I mentioned before is acquisition happens in the digital channels with digital brands. Most of the traditional brands, banks have troubles of um, playing at par with the near banks in the acquisition game. So if you don't acquire new customers down the road, you will have an eroding market share, eroding revenues. It's not going to come overnight. But we're uh, big fans of sort of having multiple brand approach for traditional banks. I think that's what's going to happen. Some someone in a garage launching the next thing around near banking and then maybe going into tokenization, stable coins, whatever it is. Um, I think that train has left the station.

Speaker A: I think that about wraps up our discussion on Revolut's UK banking license. We've explored why the company went through such a lengthy process despite already being able to lend, what this means for its flexibility, costs and competitive position, and how it fits into the broader neobank landscape, both in the UK and international. One thing that stands out is that the news highlights the balance neobanks must strike between growth, regulatory compliance and customer trust. Looking ahead, it also raises questions about the next evolution of banking, whether incumbents will be able to keep up with the rapid expansion of neobanks and how global market shares and neobank revenue streams will look when a dust settles. Thank you Christoph for sharing your insights, and thank you for listening. For FSTech, um, I'm Isaac Hanson, and we'll see you next time. This is the FSTECH podcast.