What does Revolut’s $500m raise mean for challenger banks and the FinTech space?

Revolut has finally closed a $500m investment round after years of speculation, leaving people wondering where that leaves other challenger banks and the rest of the FinTech industry.

Revolut finally closed its funding round in the end of February. The $500m round has left the UK challenger bank with a whooping $5.5bn valuation and the FinTech industry wondering what’s next.

Nikolay Storonsky and Vlad Yatsenko founded the company in 2015 and now serves as Revolut’s CEO and CTO respectively. Together they have created a behemoth employing 2,000 people in 23 offices across the world. They are expecting to grow that to 5,000 employees this year.

Additionally, the digital lender claims to have over ten million customers globally. Since its launch, Revolut has processed over one billion transactions worth over $130bn. “Going forward, our focus is on rolling-out banking operations in Europe, increasing the number of people who use Revolut as their daily account and striving towards profitability,” Storonsky said.

The new price comes after five years fraught with twists and turns. Among other things, Revolut has been slammed with accusations of mistreating its staff and job candidates in order to ensure the scaleup’s rapid rise. These allegations were most famously levied in a widespread Wired feature in the beginning of 2019. Storonsky later responded that while the company had not “always gotten things right”, it “absolutely want to be” a company that aims to be better.

Revolut has also been accused of offering a subpar customer service. Most recently, these accusations were hurdled against the neobank when it butted into a Twitter conversation its competitor Monzo was having with Monzo customers.

Even the new $500m raise has not been straightforward. People have been speculating about the raise for two years. Rumours have been circulating about when and how big the raise and the subsequent valuation would be. At one point it was suggested that Revolut would hit a $10bn valuation. Things seemed to be up in the air even the week before Revolut officially went public with the raise. A Telegraph story stated that company would reach a $6bn valuation before the neobank officially gave the $5.5bn figure.

So what does the $500m round mean?

For some of the members of parliament it serves as a testament to how well the UK FinTech scene will do after Brexit. “It is clear that the UK FinTech sector continues to thrive and Revolut’s announcement, which comes on the back of record-breaking FinTech venture capital investment in 2019, is a clear indicator of our strength as a place for FinTech business as we leave the EU,” said John Glen, the UK economic secretary and City minister.

Revolut has opened offices in Lithuania in order to ensure its expansion across Europe. It secured its banking licence in the country in 2018.

Comparatively, German rival N26 has decided to close its UK operations because of Brexit, citing too complicated regulations as its reason to up sticks. Both Monzo and Dutch digital bank bunq have commented on the decision with the suggestion that might have more to do with N26’s failure at attracting British customers. “[N26] didn’t connect,” said Tom Blomfield, CEO and founder of Monzo.

Some believe that Revolut’s new $500m raise places it ahead of its competitors. “From an industry perspective, I think it positions Revolut as a clear number one,” Tim Hyde, chief marketing officer at 220 Bank, the digital private bank for influencers, told FinTech Global. “Although they would argue they were before. [It] means that the likes of Starling and Monzo will need deep pockets to battle against them on all fronts.”

Revolut now shares the same valuation as Swedish buy now, pay later unicorn Klarna, which reached the $5.5bn mark in the summer of 2019 when it raised $460m. However, people have pointed out that these two FinTech ventures are very different. Sebastian Siemiatkowski, the co-founder and CEO of Klarna, recently told TechCrunch that the 15-year old company has been “profitable every year up until this year.”

Comparatively, Revolut, much like its British peers save for OakNorth, is still unprofitable. And some investor are still feeling cautious about the unicorn.

“If you have drunk the [kool-aid] perhaps you buy [Revolut’s] increasing valuation but I don’t see them as a bank, rather a convenient card especially for FX transactions, so I am sceptical on how they increase revenue to maintain an increasingly large fixed cost base,” an anonymous investor told Sifted.

The capital injection also means Revolut now face more pressure to demonstrate its worth. “[It] and other challenger banks [must now] show they can compete with the current incumbents and find a way of becoming viable, sustainable economic entities,” Aneesh Varma, founder and CEO of Aire, the alternative credit agency, told FinTech Global.

“Investors will be looking for significant returns from that money and they’ll want to see Revolut become at least a $5bn company off the back of it. This is going to be an incredibly competitive space as they move more into lending products such as credit cards, personal loans and mortgages.”

Revolut is not alone in raising capital. Rival Starling Bank raised £60m in early February 2020 and Monzo raised a £113m funding round in June 2019. “Armed with a substantial amount of capital, challenger banks like Revolut will be able to act more like the big banks they are seeking to take on,” Varma said.

“This means offering a broader range of products to attract more customers and deepen the relationships they already have. Does it also mean they’ll be forced to become everything they’ve fought against? It’ll be exciting to see what happens in the lending space in the coming months, be it challengers launching new services themselves or snapping up some of the innovative lending FinTechs that are going around.”

He added, “There are a handful of challengers that are getting into a position where they can move into the mainstream. It is likely we’ll see some industry consolidation and acquisitions as challenger banks seek to broaden their service range and reinforce their positions.”

Does that leave any room for new FinTech startups? “Yes definitely,” answered Hyde. “From a technology perspective there’s not a huge amount that separates brands within the sector. However, at 220 [we] are trying to provide a bespoke service which is targeted at a currently untapped demographic.”

Varma offered a slightly more cautious reply. “It remains to be seen what impact it’ll have on very early-stage FinTech startups and whether the next generation dares to take on the likes of Revolut,” he said. “This kind of cash will excite some entrepreneurs but scare off others that think it is simply not worth trying to compete. There is more pressure on Revolut now to get this right.”

Copyright © 2020 FinTech Global

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