|01 October, 2019

Digi-banks seem short on financial innovation

Neo-banks like Revolut, Monzo, and N26 have attracted millions of users and ballooning valuations. Yet despite their slick technology, there’s a distinct lack of profitable financial innovation

An illustration picture shows a Revolut bank card in London, Britain September 4, 2019.

An illustration picture shows a Revolut bank card in London, Britain September 4, 2019.

Reuters/Kevin Coombs

LONDON - Digital banks have spent the past few years schooling incumbent lenders on how to provide user-friendly online accounts. Neo-banks like Revolut, Monzo, and N26 have attracted millions of users and ballooning valuations. Yet despite their slick technology, there’s a distinct lack of profitable financial innovation.

Take London-based Revolut, which released its 2018 annual report on Tuesday. The company founded by Nikolay Storonsky more than tripled its retail user base to 3.5 million during the year. Revenue jumped to 58 million pounds, from 13 million pounds in 2017.

That’s not very much money, especially considering that 70% of it came from traditional fees linked to spending on payment cards. Assume Revolut’s average number of retail customers in 2018 was about 2.1 million, of whom half use the service at least once a month, as the company currently claims. Revenue per active user was then about 53 pounds, according to Breakingviews calculations.

How can Revolut, which lost 33 million pounds after tax last year, justify its lofty valuation? Generously assume Storonsky manages to wring a 23% free cash flow margin from his user base – as established tech giants do. That would equate to 12 pounds per user per year, giving each customer a present value of 82 pounds ($101), assuming a 15% discount rate. Revolut would need almost 17 million active users to merit the $1.7 billion valuation it achieved last year.

Storonsky and Tom Blomfield, his opposite number at Monzo, have shunned conventional banks’ business models, which are based on lending at a higher interest rate than they offer on deposits. Instead, the upstarts are focused on extracting more revenue from each user. Revolut hopes to lure more people to its “Metal” and “Premium” services, which charge a monthly fee in return for benefits like limitless currency transfers, cashback and concierge services. Monzo hopes to offer third-party products like savings in return for a small commission.

But most consumers aren’t used to paying for a bank account, and competition is fierce. In the meantime, Monzo is expanding in overdrafts, and Revolut plans to charge a fee for stock trading past a certain limit. That’s not too dissimilar to reliable cash cows used by conventional banks. To justify their disruptive status, digital banks need to provide more evidence they are doing something truly new.

CONTEXT NEWS

- Revolut’s revenue more than tripled to 58.3 million pounds in 2018, according to the London-based digital bank’s annual report released on Oct. 1. Its loss after tax widened to 32.9 million pounds from 14.8 million pounds in 2017.

- As of Oct. 1, the group has 7 million users across Britain and Europe, of which about 3.7 million are active on a monthly basis and 1.1 million use the bank’s services daily.

- UK rival Monzo said on June 25 it raised 113 million pounds from investors at a valuation Reuters reported was more than 2 billion pounds.

- Revolut’s Chief Executive Nikolay Storonsky said on June 21 that his company would only consider an initial public offering after achieving a private valuation of $20-40 billion, according to Financial News.

(Editing by Peter Thal Larsen and Karen Kwok)

© Reuters News 2019