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Billions Poured Into Neobank

The UK-based neobank Revolut has raised DKK 3.5 billion to continue in its quest to become the world's first global bank. Experts expect that the record-breaking amount, which values Revolut as the largest in Europe, will generate more money for other neobanks - and challenge traditional banks in the long run.

11. Mar 2020
5 min
Af Bjørn Willum, freelancejournalist

​Investors, led by the US tech fund TCV Investments, have poured billions into UK-based neobank Revolut, which is making a strong bid to become the world's first global bank.

The risk-taking investors have paid DKK 3.5 billion for approximately a tenth of Revolut's business, which roughly consists of a headquarters in London, 2,000 employees, over 10 million customers - but not a single branch.

The money will be used to expand the business from 34 to 58 countries in the coming year - most notably in the US, where customers are already queuing up online.

But although the words of founder and CEO Nikolay Storonsky demonstrate the investors' confidence in his "mission to build a global financial platform - a single app where our customers can manage all their daily finances", the news will have wider implications, according to a Danish Fintech expert.

"It proves that there is still an enormous appetite for this market. Because the fact that they are able to raise such a valuation means that there are others who can try to do the same. They have set the bar higher for the entire market, so in the short term it will generate greater financing for the entire neobank segment," says Johan Lorenzen, who helped found the neobank Holvi, which he later sold to the Spanish bank BBVA.

Traditional banks should be concerned

The injection of capital means that Revolut are now valued at DKK 38 billion - a valuation that according to the research by Finansforbundet's newsletter is only surpassed by the Brazilian Nubank, which, does not, however, have global ambitions at present.

As a consequence, Revolut has received a cash injection to rival the German-based N26, which announced in January that it had reached five million customers in 26 countries, including the US - before announcing its withdrawal from the UK last week in connection with Brexit.

Officially, however, Storonsky does not consider N26, whose strategy and customer segment is otherwise in many ways similar to that of Revolut's, as its 'real' competitor. In his opinion, it is the traditional banks whose customers are tired of high and non-transparent fees and have no need of a physical branch.

And Johan Lorenzen believes that the traditional banks should be concerned in view of the fact that not only Revolut - but also a number of other European neobanks, such as Monzo in the UK or Lunar in Denmark - are raking in customers.

"They have this in the long term. They also have a task in being converted. If Revolut succeeds in converting their customers from secondary customers to primary customers, they will become direct competitors to traditional banks. It is therefore this that they must try to succeed with now," says the Danish Fintech specialist.

Used as secondary account

At present, everything indicates that customers of neobanks are largely people who try them out - so they continue to have their salaries paid into their traditional bank account, but use their Revolut or N26 MasterCard when, e.g. they need to travel.

Although this requires a premium account with a monthly subscription payment, it allows access to travel insurance and free use of the card when abroad, even when making cash withdrawals - and without mark-up fees for foreign currency.

I myself am a Revolut customer for example - I use it during periods when I travel, but then I don't use it at all until I need to travel again," explains Johan Lorenzen.

But Revolut will not disclose how many people pay for these premium accounts - a basic bank account in a neobank is typically free - and not at all how many use the neobank as a primary account.

And if you do not make money on currency fees when customers use the credit card abroad - as traditional banks do - how can you create a profitable business in the long run?

Revolut offers many services in addition to currency exchange, including international money transfers, share trading, cryptocurrency and both premium and business accounts. "We do not depend on one source of income," said a spokesperson for Revolut to Finansforbundet's newsletter.

Profits promised for this year

Nevertheless, Storonsky proclaimed that "we will be profitable this year" at the Paris Fintech Forum, where he received a reception worthy of a rock star last month. An achievement that virtually none of the other neobanks have managed so far, in part because they focus on expanding too early.

"I believe that it's unrealistic for them to maintain the same rate of expansion and be profitable at the same time. This would require another product, such as a loan option, which would change how much money they make on each customer and how long the customers would stay," assesses Lorenzen.

"They are currently using a fair amount of money on getting people in, and they don't stay very long. Perhaps a few years on average."

This is also one of the things that Revolut is apparently planning to look into this year.

"We are not offering loans at the moment, but we plan to start rolling out loan offers in specific markets by 2020," said Revolut's spokesperson.

However, no indications of the types of loans that will be on offer have been reported by the story so far.

Pouring in with competitors

In the meantime, new neobank competitors are pouring in, as the established banking sector also seems to believe in the phenomenon, especially in the UK.

The Financial Times and television station Sky News reported over the weekend that US investment bank JP Morgan is coming up with plans to establish a neobank in the UK. This comes after the Royal Bank of Scotland launched Bó in November, and two years after Goldman Sachs targeted digital consumers in the UK with Marcus.

Earlier this month, Finansforbundet's newsletter reported that Revolut had reached 50,000 customers in Denmark. The following week, the Danish-based competitor Lunar told FinansWatch that it has over 140,000 customers in all of the Nordic markets, most of which are located in Denmark.