How much trouble are Revolut, Starling Bank and Monzo really in?

UK digital lenders Revolut, Starling Bank and Monzo have reported massive annual losses. What does it mean for their future?

There’s a reason challenger banks grab people’s attention. With no physical branches and offering fully digital services, companies in the sector have shaken up traditional banking, reached unicorn status in no time at all and become proverbial nexuses for FinTech and business innovation. So what happens when three of the leading neobanks report that they have doubled and even tripled their losses in the last year?

That’s the question neobank aficionados must ask themselves after the past three weeks have seen Revolut, Starling Bank and Monzo deliver their annual results, each of them reporting that their losses have skyrocketed in the last year.

“Perhaps the shakiest of the three FinTechs is Monzo” Charlie Barton, investment specialist at personal finance comparison site, tells FinTech Global.

The challenger bank was also the first out of the three to report its annual results. In the last year, Monzo doubled its annual post-tax loss from £47.1m to £113.8m.

Some of its losses were due to the costs of the company expanding into the US, increasing its marketing and having hired more staff.

Monzo also admitted, in one of the most quoted passages from its report, that its “revenue streams have been significantly impacted by the Covid-19 pandemic and resulting macro-economic uncertainty,” adding that the coronavirus had cast “significant doubt” on its ability to continue operating. Additionally, the pandemic has forced the company make hundreds of employees redundant or put them on furlough and close its Las Vegas office.

Accountancy experts were however quick to come to Monzo’s defence, stating that this was simply accountancy speak for macro concerns businesses must mention in their report. In fact, it is very common for companies to put in big risks in their reports, especially as regulators have been pushing for firms to be more transparent about going concerns related to the pandemic. In other words, it could be seen as a box-ticking exercise.

“But, the recent launch of Monzo Plus should bring in more revenue, plus Monzo’s directors have reiterated that the company can raise capital if needed,” Barton says, noting that the FinTech unicorn did just that in June when it raised a £60m round. Although, that round saw its valuation drop by 40% from $2bn to $1.24bn.

On the plus-side, the bank did also triple its revenues from £19.7m to £67.2m.

Starling Bank was the second UK challenger bank to reveal its annual results. It revealed that its losses had jumped from £26.9m to £53.6m in the last year. At the same time its  its revenues rose from £750,000 to £14.2m, increased its run rate to £80m and claims it is on track to break even by the end of the year.

A huge part of this bullishness is due to the bank having upped its lending in response to Covid-19.

“When the coronavirus crisis hit the UK, at Starling we were not prepared for all the ways it would transform everybody’s lives; but we were prepared for change. We always are,” Anne Boden (pictured), CEO and co-founder of Starling Bank said in an open letter.

“At the time we were putting the finishing touches to a slate of new products for small businesses, including lending products. So when the lockdown started and small business owners needed emergency help, we were able to swing into action and have committed more than £1bn of lending under the government-backed Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme to support them.”

Revolut was the last one out, having reported its annual results earlier this week. Despite tripling its losses from £32.8m in 2018 to £107.4m in 2019, the challenger bank was bullish about its ability to break even by the end of the year. “Revolut’s aggressive expansion accounts for a big chunk of increased losses,” says Barton.

Indeed, the losses were driven by a huge hiring spree that saw its staff numbers skyrocket from 633 employees to 2,261 in the last year.

And there’s reason for its bullishness as it enjoyed a 180% spike in its revenues since 2018, totalling £162.7m in 2019, just shy of its £180m sales target. Roughly two-thirds of that came from the 0.2% interchange fees customers pay when using Revolut debit cards.

“Revolut is also arguably better placed than its rivals to have emerged from coronavirus with a few wins under the belt,” argues Barton. “Unlike Monzo and Starling, Revolut’s cryptocurrency and nascent trading features will have surely pulled in some more customers since lockdown began, if the explosion in interest in other investing apps is anything to go by.”

The fact that a potential rival to its stocktrading service, Robinhood, decided to cancel its UK rollout earlier in the summer should have also added a certain spring in Revolut’s leadership’s step.

The results also comes on the back of a year of achievements on Revolut’s part, with the neobank kicking off the year by raising a $500m Series D at a $5.5bn valuation in February, which it then topped up this round with another $80m in July. Revolut has also finally launched in the US and in May it started to operate fully as a bank through its Lithuanian banking licence.

Revolut’s co-founder and CEO Nikolay Storonsky also said in an interview in May that the coronavirus crisis could prove to be an opportunity for the company to acquire struggling startups offering services – such as travel aggregators – that could enrich Revolut’s services.

Still, not everyone is convinced about Revolut and Starling Bank’s ability to break even this year.

“I’m not sure they’re adding any sustainable value to their customers [with] a lot of the low cost items like [foreign exchange] seems to be there for customer acquisition and paid for by venture capital and Revolut seems to already have quite a reputation for poor customer service,” Fredrik Davéus, co-founder and CEO of WealthTech100 company Kidbrooke, tells FinTech Global. “So to become profitable I think they will try to mimic the incumbent business models more and more over time.“

Arsen Torosian, CEO and founder of Tap.Global, the cryptocurrency trading platform, also advises for caution on the back of the neobanks’ results.

“It shows that the business model these FinTechs are following isn’t working in the manner they had hoped,” he argues. “Secondary service charges are not covering primary services costs. Either these FinTechs will need to start charging for standard banking services or provide other services that their customers are willing to pay for. With their current model I don’t think they’ll be able to turn a profit.”

Copyright @ 2020 FinTech Global

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