What Revolut’s $33bn valuation tell us about the future of financial services

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Hello and welcome to CFTE’s Fintech Shot – a weekly curated newsletter about what matters in Fintech. Click here to join this newsletter and receive weekly fintech news, articles and more.

Revolut raised a funding round of $800m at a valuation of $33bn. The two investors were Softbank and TigerGlobal. What does a $33bn valuation for a 6-year old Fintech startup tell us about the future of finance ? Read ahead.

FINTECH NEWS IN THE SPOTLIGHT

What is Revolut?

Revolut was founded in 2015 by Nik Storonsky and Vlad Yatsenko, and started from Level 39, the Fintech ecosystem of Canary Wharf (the new financial district of London). Level 39 was designed to accelerate innovation in financial services and support the growth of Fintech startups in London. Quite a few successful UK Fintech startups started at Level 39, such as Revolut, eToro or Digital Shadows.

(Fun facts about CFTE and Revolut: in 2019, CFTE moved to Revolut’s former office in Level 39. For the second CFTE Extrapreneurship, 70 CFTE participants worked with the Revolut team to build a go-to-market strategy)

Revolut started with a very simple value proposition: a prepaid debit card with no FX fees for those travelling abroad. From an innovation standpoint, that was an example of unbundling of finance, which they did very well, by growing to 500k customers in their first year of operation.
At the core, unbundling is about providing a cheaper / faster / better service, and this is exactly what Revolut did: cheaper (0 fees), faster (instant notification), better (very modern user interface)

Although services such as Revolut are now extremely common, there were 3 differentiators that drew customers to Revolut:

  • WOW factor: the packaging of Revolut’s card was revolutionary for a financial product. Have a look on Youtube at “Unboxing Revolut card” – how many people take a video when they receive a debit card?
  • Instant notifications on mobile phones: Revolut clients were surprised to receive a notification on their phone at the same time they were paying at a shop. Until then, they had to wait days or weeks to check their bank statements.
  • Social sharing: from their apps, Revolut users could find their friends, add them, and send them money instantaneously, in a similar way to Whatsapp.

This last feature helped the growth of Revolut through referrals, and they frequently mentioned that their Customer Acquisition Cost was £0 during their first few years.

This was very important, because the success of unbundling strategies relies on fast customer acquisition through low CAC, and by the end of 2018 they had a customer base of 3 million users.

The natural step after unbundling is rebundling to increase customer loyalty and usage, and Revolut started to offer mobile phone insurance in 2017, then over the years saving accounts, crypto currency trading, etc. From a business standpoint, their 2 most important rebundling decisions were 1) to offer a premium subscription service and 2) expand their offering to SMEs

Today, Revolut offers banking services to: retail clients (16m), SMEs (500k) and across payments, savings, crypto investing, expense management, etc. It is the most global neobank, with a presence in 35 countries.

Last year, they made £260m of revenues, split almost equally between interchange fees, FX/ wealth and subscription fees.

Why is Revolut’s fundraising important?

Revolut raised its latest round at a valuation of $33bn, which in itself is a staggering number.

With a $33bn valuation, it becomes a top 5 private Fintech company, after Ant Group ($312bn), Stripe ($95bn), Robinhood ($40bn) and Gojek ($35bn).

If we were to compare it with the European banks, Revolut would be the 11th largest European bank, after HSBC ($113bn), Sberbank ($90bn), BNP Paribas ($75bn), Santander ($61bn), Lloyds Banking Group ($58bn), UBS ($57bn), Barclays ($53bn), Intesa San Paolo ($50bn), ING ($47bn) and Credit Agricole ($40bn).

But private valuations can of course widely fluctuate – and some might be wary of putting too much weight on a Softbank valuation – so let’s just say that independently from the number, Revolut is now one of the major companies in Fintech financial services.

Since Revolut became more widely known, it has attracted controversies, with questions around its aggressive culture and hiring practices. Many also raised questions around its business model, and in particular lack of profitability.

At CFTE, we have used Revolut as a case study since 2017, and our co-founder Huy Nguyen Trieu, frequently uses Revolut as a prime example of unbundling/rebundling strategy.

According to Huy :

  • A startup focuses on a narrow vertical and offers a cheaper/better/faster solution than existing offerings. In the case of Revolut, it was debit cards for travellers.
  • Its first objective is to grow its customer base very quickly with a low Customer Acquisition Cost, that demonstrates Product Market Fit.
  • As the startup grows its customer base, it increases its product suite to build customer usage and loyalty.
  • In the trade-off between growth and profitability, growth comes first. Funding is provided by external sources such as venture capital or the stock market.

This is what Huy calls the Amazonification of finance, with Amazon starting on a narrow vertical (books), and focusing on customer growth for more than a decade before profitability. In innovation terms, it’s a high risk but potentially high impact strategy. The two main hurdles for the startup is 1) always attracting capital and 2) fending rising competition. But for those who can overcome both, market domination is the objective.

Revolut is therefore important because it is one of the best examples of the unbundling / rebundling process in FS.

Secondly, Revolut is important because it answers the question : can a Fintech startup be truly global? Fintech companies can be very big (Ant Group, but in China only), Internet companies can be truly global (Google), but can Fintech companies be truly global? This is the question that Revolut helped to answer, and the answer is Yes..

And finally, Revolut is important because it answers the question : how do you make money in financial services. Until 5 years ago, it was conventional wisdom that making money through transformation (ie lending vs borrowing) was the core of finance, with 2/3 of revenues of banks coming from there. In the case of Revolut, this is absolutely not the case, with money coming from fees, FX and subscriptions. Revolut shows that it is possible to offer banking services without being fully reliant on net interest margin.

What next for Revolut?

This is of course the million (billion? decabillion?) question: what is the future of Revolut?
Looking at conventional metrics, Revolut’s valuation is in stratospheric territory:

  • $300m of revenues vs $30bn, i.e 100x Price to Sales ratio. This is almost double the highest Price to Sales Ratio, which was Snapchat at 60x during their IPO.
  • 16m users, even netting $100 each would represent just $1.6bn of revenues, i.e. a Price to Sales ratio of 50x.

However, we could take another view, which is that whether it’s $30bn or $10bn, this is not that important. If we follow the playbook of cheaper/better/faster innovation, Revolut’s strategy is to continue its fast growth until they dominate the market, i.e. do in finance what Amazon did in retail. Or globally what Ant did in China.

The objective is therefore not 50 or 100 million users, but 500 million.

Can Revolut achieve this? Let’s say that for one Amazon, there are hundreds of dead startups. So yes, Revolut is well placed, but if not them, it’s likely that another one will.

In terms of strategy, Revolut’s main priority should be exponential growth first and foremost, whether organically or through acquisitions (which is where a $30bn valuation can be helpful…). This is now a race against time for Revolut where they need to grow their customer base in each country before local or global competitors make their CAC too high.

Like we have said for the last 4 years, it will be fascinating to see where they go…

KEY TAKEAWAYS

  • The hyperscalability of Internet companies can also apply to Fintech
  • Unbundling then rebundling of finance by Fintech startups has happened
  • Investors are betting on the next “Amazon” in finance
  • Fintech startups can be global
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