Revolut Becomes a Bank...Again | TWIF UK & Europe

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Well… Revolut timed their next banking licence perfectly to paradoxically make me look like an idiot and prove my point at the same time.

In my last newsletter I walked us down a Eurocratic memory lane whilst espousing the importance of economic ties helping to ensure peace. In particular Passporting. Passporting allows a regulated entity in one region to perform the same regulated service in another area.

I highlighted how important that law is to ensuring prosperity and in the case of Fintech, how inefficient it had become operating your business in the UK and EU without it….

And then literally on my next newsletter, Revolut announces it has become a Bank… in France… When it already had a banking licence in Europe and it could have just PASSPORTED its permissions into France.

So one… I would have to ask the obvious question. why?

Revolut already had a European banking license in Lithuania through its local entity Revolut UAB. Therefore has the authority under the EU’s passporting rule to offer banking services across the European Economic Area (EEA).

In fact, that is exactly what they have been doing for the last several years.

However, a banking license in France might help us understand the direction Revolut is going. Perhaps they are no longer content with being a ‘just’ a Fintech. Rather, they are working on the foundation of a true pan-European banking group.

To understand why I’ll go back down memory lane.

From travel card to financial super-app:

When Nik Storonsky and Vlad Yatsenko founded Revolut in 2015, it was a simple and elegant proposition and a LOT of theatre.

Foreign exchange was expensive. ((was the pitch… in reality it wasn’t but it was poorly promoted. For fun use the way back machine and check out Wise’s (FKA Trasnferwise) Adverts circa 2016.)

Banks had unattractive exchange rates, card fees, and foreign transaction charges. Revolut had an app, a prepaid card, and the ability to hold and exchange multiple currencies.

This was pretty much cross-border currency exchange, transfer of money, card payments and withdrawals.

This was a wedge product for a narrow problem.

I’ll admit I thought the idea was dumb at the time, but Credit to Revolut where its due, they started and continued to grow at an astonishing rate.

Revolut Business was next. Then Premium and Metal subscriptions. Then came the trading of cryptocurrencies and, with time, Revolut made a plethora of offerings including insurance, Open Banking, merchant services, personal and business loans, credit, and investment offers, travel accounts, children’s accounts, commodities, ETFs and bonds trading.

What started as a method for avoiding FX fees eventually turned into an almost obsessive effort to house every financial product likely to be required by a consumer within a single application. That’s not even mentioning there various forays outside of financial services (eSims, Employer of Record etc).

There was, however, a one issue.

Revolut could keep adding products to the front end, but if it wanted to be the customer’s actual bank and not just an application sitting over a bank, it needed to have its own bank license.

Revolut’s first licence was obtained in Lithuania. An odd jurisdiction you’d guess if not from Europe, but Revolut had a long established entity there as Lithuania is one of the most fintech friendly jurisdictions you can get in the EU.

Once they had it, it changed the economics of Revolut.

A payments company makes money primarily when customers transact or pay fees. A bank makes money when customers deposit money. A bank makes money when it lends money to customers. A bank can make money when it issues credit to customers. A bank makes money from interestA bank makes money from its customers.

Fintechs generate kinetic (some state needs to change e.g. a payment) revenue. Banks generate everything (nothing needs to happen) revenue.

This is the important difference between being someone’s travel card and becoming their bank. This is the important difference between being someone’s travel card and becoming their bank.

A customer might keep €500 in Revolut for vacations and travel-related foreign currency transactions.

But a customer who has their €4,000 salary paid into Revolut, has €30,000 savings, has a credit card from Revolut, and eventually takes a mortgage from Revolut is a real customer.

This is the customer Revolut really wants. This is why banking licenses are so important.

But it still makes me ask the question, why can’t Lithuania be enough?

Speculation time…

This becomes a special case for the French licence.

As part of the passporting rules of the EU, Revolut doesn’t need a French banking licence to serve customers in France. Their Lithuanian bank can do that and Revolut already has millions of customers in France.

So its obviously not an access issue.

It might be how Revolut wants to structure Europe.

The French banking licence will most likely be the banking centre for Revolut’s Western Europe banking operations. France is the first country to be serviced, but customers in Germany, Ireland, Italy, Portugal, and Spain will most likely be next.

Lithuania will serve the remaining European markets.

What this means is that Revolut is building two banking hubs in Europe. And I have a funny feeling it wont be the last.

My fear is that this is really a smart play by Revolut, but for reasons I don’t want to be proved right about. Firstly and less worryingly, the passporting system is great, but when it comes to accommodating the needs of the customer, it is not as flexible.

For a payment account and a cross-border debit card, a banking licence in Lithuania is just fine.

However, if you want to provide a competitive service to domestic banks for salary, savings, loans and mortgages, the needs of the customer begin to change.

Banking services and products become more important. Having a good relationship with the regulator becomes more important. And having a good reputation becomes more important. France is an ideal case to point.

Revolut has about seven/eight million customers in France. At first I thought it might be to make bill payments easier as nobody receives salary into an acocunt that can’t pay the basics. But then I googled it and saw Revolut already issues FR IBANS. so can’t be that.

Maybe its Savings products meant for France. Consumer loans. Credit. Eventually, mortgages and other items that resemble traditional banking more. (But then Gemini told me it does most of that too) Could be concentration? Could be…

The second and margianlly more worrying this…Is it a structural thing. Revolut is huge.

Revolut has more than 75 million clients worldwide, of which about 30 million are in Western Europe.

With that level of growth, it is increasingly odd to run the vast majority of your European banking operation through a single Lithuanian banking entity.

For a long time, Lithuania was a great choice for Revolut’s first European banking operation. But look at it on a map, And then look down about… about 500 miles (as the drone flies).

Revolut is now a very different banking operation than it was when it first applied for the license. And with things rumbling on in Eastern Europe and Putin seemingly lacking a face saving off ramp, maybe the issue is one of Business Continuity…

Revolut is now focused on being one of the largest banking operations in Europe.

Establishing a second major banking operation in Europe alleviates concentration.It provides Revolut a new balance sheet. It provides Revolut a new banking relationship. And I think at the size they are, politics is a necesary consideration.

It provides Revolut a new hub from which it can passport banking services.

Most importantly, from a structural banking point of view, it makes Revolut’s entire European banking operation no longer reliant on one regulated entity.

It doesn’t mean I’m a super genius and it doesnt mean that Revolut no longer believes passporting is a viable option. But one would have you at least consider the upheaval we re going through now as a motivating facto.

Passporting is still a core aspect of Revolut’s new banking strategy.

The opportunity is that now banking services can be passported from multiple banking hubs.

Revolut is leveraging the application of distributed architecture to banking regulation.

We the customers still see a single Revolut application.

But in reality, Revolut is able to maintain backend applications with multiple regulated banks, investment firms, insurance firms, and specialist entities across various jurisdictions.

What can we expect in the next two years?

Based on my speculation, I expect that by 2028 Revolut will have a much more significant presence as one of the major retail banks of Europe, as opposed to a fintech. (we already see their ATMs dotted around and announcement of physical branches)

I think they will add more licences outside the EU.

And we will see them enter the BaaS Space, and passporting that model is fraught with complexity. So a Banking licence helps to sure up those ambitions.

But mostly, I expect Revolut to attempt a HSBC 2.0. A global trading network of proprietary technology plugged in to local rails vs buying banks and running them with a lick of paint in your own branding.

Anyway, both uncertain and exciting times ahead!

Happy reading!

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Word of the week: floccinaucinihilipilification

The act or habit of describing or regarding something as worthless or unimportant.

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