Fintech/Analysis/ Inside Revolut and Monzo’s mammoth funding rounds With a series of fintech mega-rounds on the horizon, investors and industry experts weigh in on the upcoming raises — and the dangers they reveal about the market for challenger banks. By Isabel Woodford 17 February 2020 \Fintech Financial health: what’s missing, and how fintechs can help close the gap By Steph Bailey 23 May 2022 Fintech/Analysis/ Inside Revolut and Monzo’s mammoth funding rounds With a series of fintech mega-rounds on the horizon, investors and industry experts weigh in on the upcoming raises — and the dangers they reveal about the market for challenger banks. By Isabel Woodford 17 February 2020 Last week, UK challenger bank Starling announced a £60m raise; the first of the retail banking apps to lock down their next stage of investment. Joining them on the fundraising trail is Tandem Bank and Monese. But the biggest raises are expected to come from Revolut, which is reported to be raising up to $500m and London-based Monzo, which is said to be eyeing up to $130m later this year (partly to meet capital requirements). Revolut’s raise is expected imminently; possibly as early as this week. In preparation, we assess the mood behind the scenes, investor concerns about margins, as well as long-term funding doubts. “Challenger bank fatigue” Regardless of how much the neobanks eventually raise, it’s been a difficult round by all accounts. Industry experts speak of “challenger bank fatigue”, as the sheen and buzz of prior years has started to wane, leaving investors wary. “There is some investor fatigue with simple, ‘new skin’ banks,” says Simon Stewart, who runs fundraising network The Growth Stage. “Fund managers [must] work out the differentiation between the offerings; not what the customer sees but the difference in their business models.” Even those leading the raises have observed growing investor reticence. “Fatigue? That could be true — everyone seems the same,” Monese chief executive Norris Koppel told Sifted earlier this month. Meanwhile, Tandem Bank is believed to have fallen short of its initial £100m target, with multiple sources saying the amount raised is closer to £50m. One source close to the upcoming Revolut deal also said that, while there are still a number of willing investors, the fintech has had difficulties raising at its desired valuation. Overall, investors’ attention is shifting away from pure business-to-consumer (B2C) banks to those with proprietary banking-as-a-service (BaaS) technology, says Stewart. “That’s when we really see institutional investors get out of their seats.” Bankrolling the banks The current “fatigue” comes in part from the continued lack of clarity around margins. German bank N26’s withdrawal from the UK last week and the demise of banking app Loot last May only serve to highlight the challenges this sector faces beneath the hype. Although Revolut reported revenues of £58.2m in 2018, its losses are expected to grow again this year due to rising costs. Similarly, Monzo, Starling, Tandem and N26 are all loss-making (although most claim they’ll breakeven in the coming years). The question now is not these companies’ ability to challenge the incumbents (Monzo and Revolut already have over 10m “customers” combined), but whether their profit margins and valuations are sustainable. Indeed, if Revolut does win the rumoured $10bn valuation in its upcoming raise, it would become more valuable (at least on paper) than the likes of UK companies such as investment group Standard Life Aberdeen (with more than £2bn in revenue) and the InterContinental Hotels Group (boasting more than £4bn in revenues). According to a former digital bank executive, who requested anonymity, prospective investors are therefore starting to apply more intense scrutiny than in previous years. “They are now in the next phase of reality. [They’re asking] how much is the average balance, what’s the activation rate, dormant rates, customer service costs etc.,” the executive told Sifted, adding that the time for grandiose PowerPoints was over and had been replaced with hard numbers in spreadsheets. In turn, Revolut and Monzo will now have to prove they can generate organic growth rather than relying on venture capital-funded advertising, says Alessandro Hatami, a financial services veteran and former advisor to London-based fintech Curve. “[Their] achievements are heavily funded through equity injections… Eventually, [the banks] will need to transition to a growth model funded by sources other than equity,” he told Sifted. It’s worth noting that although Revolut has raised the least investor cash of its three main digital peers, it boasts the most downloads. Once lucky, thrice shy Doubts about investors’ long-term commitment are also rooted in these fintechs’ source of funds. Specifically, Monzo and Revolut have been largely propped up by tech investors to date (Starling, in contrast, has avoided traditional venture capital funding). The companies have also previously found traction with deep pockets overseas, given the UK’s limited late-stage capital pot. Revolut’s last $250m round in 2018 was led by Hong-Kong based DST Global, while Monzo raised $113m led by the Californian accelerator Y Combinator in a Series F round last year. However, this has drawn accusations that the fintechs are riding a precarious tech funding bubble. As such, things could prove even tougher in future raises (highly likely given their high cost-bases). “The question is how long will investors put up with Monzo and Revolut. If the tech bubble closes in…,” the ex-bank executive remarked. Andy Ellis, head of ventures at high-street bank NatWest, also told Sifted earlier this year that he thought digital banks were in a precarious spot given they’re unlikely to be self-sustaining anytime soon. “Let’s imagine that [the fintechs] don’t break even for five years… All it takes is for someone to kind of have a wobble. And for all that money not to be there for somebody and they’re in a bit of trouble,” he said. “These guys are not superheroes. They’ve got their issues and stuff falls over quite a bit.” For its part, Monzo is likely to reserve a part of its upcoming funds to meet capital requirements rather than pure expansion (as a UK bank, Monzo is required to hold at least 8% of its risk-weighted assets in liquid cash). Meanwhile, Revolut told Reuters in November that its prospective funds would go towards “a global hiring spree”, building its staff from 1,800 to 5,000. Related Articles Member Digital banks Monzo, Revolut, Starling and N26 compared By Isabel Woodford and Kim Darrah Click here to read more 10 European fintechs with the biggest raises this year By Kim Darrah Click here to read more Exclusive: Tandem bank nears much-awaited fundraise as CTO steps down By Isabel Woodford Click here to read more Most Read 1 \Venture Capital What’s going on with European startup valuations? 2 \Fintech Klarna lays off 10% of its team amid valuation crunch 3 \Venture Capital Meet the 17 European startups selected by Sequoia’s accelerator 4 Member \Sustainability Ranked: Europe’s top climate tech investors 5 \Startup Life The metaverse sucks — IRL meetings are the way to go for growth 16 Join the conversation Subscribe newest oldest Notify of new follow-up comments new replies to my comments NickMost of Revolut’s senior team have already cashed out. That should be telling enough. The insiders don’t even have faith in the company. BusinessTeacherGreat read! For those looking for more information about the background of Monzo and Revolut, as well as internal/external factors they may face and opportunities they may enjoy, have a read of our Strategic Analysis of Monzo and Revolut! https://businessteacher.org.uk/reports/strategic-analysis-of-monzo-and-revolut.php Keith MosesDEPICTS rather than PESTEL is a more effective analytical framework for digital challenger banks: D – Demographic; E- Economic; P- Political; I- Infrastructure; C- Competition; T- Technology and S- Social kagoDo by any chance have links to that analysis Keith? Tom HI suspect Monzo and alike have a break even number i.e. knowing they can remove x of the team to get the company to break even, if needs must. Investment is still based on growth. Greg GrimerI have not yet seen the reason to leave HSBC. And I have no great love for HSBC. I would certainly not close my Barclays account. After 10 years, I have never needed to call Barclays to complain. I bet very few challenger bank customers can say that. New enterprises are always working out bugs and suffering growing pains. What is the compelling reason to change? CheeseHi Greg – I just fully transitioned across to Revolut from HSBC… Never going back! Here’s a list of reasons why, just off the top of my head: Login procedure. Information display. Security (auto card freezing for suspicious transactions & pin access). Data exporting (bank details & transactions – to csv, not just PDF!). Speed of interaction. Multiple currency accounts (& obviously insane FX rates) as standard. Real-time notifications. Customer service via chat is FAR more precise. Budgeting tools (especially Vaults). Payment ease & speed (RevP?). Perks (Metal cashback alone has already covered the cost of my a/c!) Commission free… Read more »Peter JamesGreat article. Absolutely spot on. About time the press started reporting the reality over the hype of it all. Most of these companies won’t be around in 5 years time. JamesLots of inaccuracy in this post PeterReally?! I didn’t notice any James. Isabel WoodfordJames, feel free to email at [email protected] if there’s anything specific you wish to highlight Robo-commenterHow has Starling been funded, if not by VC? VadimI am also curious, may be Starling was funded out of the thing air ? JonA Russian billionaire I read somewhere VC ComplaintsShould’ve been worded to say Funded by less-traditional venture capital players. More PE types rather than the typical VC players we know. Isabel Woodford (author)Fair point – adding “traditional” in so it’s clear it’s not conventional VC money (something Starling raise often)
Member Digital banks Monzo, Revolut, Starling and N26 compared By Isabel Woodford and Kim Darrah Click here to read more
Exclusive: Tandem bank nears much-awaited fundraise as CTO steps down By Isabel Woodford Click here to read more