In the wake of the rescues of SVB UK and Credit Suisse, the banking sector is in choppy waters. Fintechs aren’t faring much better; last week Stripe closed one of the largest stock sales in US history at a halved valuation, after both Klarna and Checkout.com saw their price tags slashed drastically last year.
Revolut is currently Europe’s most valuable private startup, as it clings onto a public valuation of £27bn from a July 2021 fundraise led by SoftBank and Tiger. But now some of its investors are reevaluating their positions.
One of the world’s leading secondary brokers, Setter Capital, has Revolut holdings listed at a discount of more than 50%, according to documents seen by Sifted — and two fintech investors also tell Sifted that a number of Revolut’s existing shareholders have already marked it down internally.
Valuation in context
Revolut isn’t an easy business to value.
It has 28m global retail customers — far more than competitors Monzo (7m) and Starling (3.5m), which are focused on the UK.
Unlike them, however, it doesn’t have a banking licence — and yet its valuation still dwarfs theirs.
Its £27bn valuation is more akin to the incumbent UK retail banks that it’s aiming to disrupt. At the time of writing, its valuation is third only to HSBC and Lloyds in the UK — despite having 12m fewer global customers and not being able to lend or accrue interest on deposits.
HSBC reported a $17.5bn profit in its last financial results (for the 2022 financial year), while Revolut’s stood at £39m ($48m) in its latest (for 2021).
In the UK, Revolut is an electric money (e-money) institution — like Checkout.com and SumUp — but its predominantly consumer focus means it mainly handles smaller payments volumes, while also having to contend with regulators for much more of its business activities.
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This means more operating expenses (like compliance hires) for fewer transactions — and yet Revolut’s valuation is 2.5x that of Checkout’s ($11bn, after it revised its internal valuation) and much more than SumUp’s ($8.5bn).
Revolut is not very profitable, yet. In 2021, it recorded its first profit before tax — of £39m — thanks to revenues nearly tripling, from £220m in 2020 to £636m in 2021.
That’s a huge uptick, but Revolut’s current valuation is still a whopping 52x multiple on its 2021 revenues. Starling — the only other profitable European neobank — was valued at $3.3bn when it last raised in 2022. That represents a mere 14x multiple on its 2021 revenues, despite it having a banking licence.
Meanwhile, HSBC’s market cap at the time of writing, £107bn, is around double its last reported annual revenues ($51.7bn, or £42bn).
Investors will have been paying a "tech premium" for Revolut. Its smooth interface, brand, ability to launch products fast and higher-margin revenue streams — like crypto — were its USP over a traditional bank.
No banking licence
Revolut may be the biggest digital bank in Europe, but its investors will want it to get still bigger — and not having a banking licence in the UK will hold it back. Without one, Revolut can’t become a primary bank account for UK customers, or offer lending products like mortgages — the key revenue sources it would need to unlock to catch up with incumbents.
“To me it’s still a secondary account offering secondary products, which are a lot more difficult to monetise,” says one fintech investor. “The question is how will they reach those billions in profits of incumbents in 10 years' time without primary accounts.”
In an interview with Sifted earlier this month, Revolut CFO Mikko Salovaara said the fintech’s UK banking licence was coming “imminently, shortly, in the very near term” — but there are still some significant roadblocks standing in its way.
One of Revolut’s biggest shareholders says the size of the business is slowing down its banking licence application (which it applied for in January 2021). It offers some 50 products and services to its retail and business customers, which is a whole lot more paperwork for regulators to get through than its competitors had in 2017.
But it’s likely not just a question of paperwork. The very regulator that must approve its banking licence application (the FCA) is the same one that’s flagged issues with Revolut's financial crime defences — Sifted recently revealed that UK customer fraud complaints at the neobank are at an all-time high.
Its auditor BDO also stated that 75% of Revolut's 2021 revenues — that's £477m of £636m — “may be materially misstated”, owing to issues with the company’s internal accounting systems.
It’s unlikely that will have helped the licence process.
“On the licence side, issues with accounting are not taken lightly by regulators or even investors,” says Gautam Pillai, an analyst at Peel Hunt.
Revolut’s revenue streams are also changing — in a way that’s likely to devalue the business.
In 2021, crypto trading accounted for 30% of Revolut’s revenues, CFO Salovaara told Sifted — but this dropped to around 5% in 2022 as the crypto boom ended.
“2021 was an exceptional year and replicating that won’t be easy,” an investor in a rival neobank says. “They will have lost lots of high-margin revenue from crypto and trading and investors will be looking at what can replace those margins.”
This year, Salovaara said Revolut is set to benefit from “a pretty strong tailwind from interest rate increases”. As it’s not a bank, it has no obligation to pay back interest to customers and can pocket it as revenue.
Like crypto, interest rate rises won’t stick around forever though.
“[Investors will] be looking at strong recurring revenue streams — people don’t like volatility and they don’t pay for one-off gains,” says Pillai.
Revolut’s CEO Nik Storonsky has not ruled out fundraising again — he told Sifted last November that the neobank will come to market if it wants to shore up some more cash for global expansion.
If he did, he’d be tapping growth investors for capital — and they’d want to know about the company’s path to IPO.
But the fact that Revolut’s auditor couldn’t verify the most recently available financial figures for the company casts a big shadow over their ability to do so.
“When these revenues aren’t certain, it makes it extremely difficult for pre-IPO investors to make an informed decision on what kind of exit might be achieved,” Pillai says.
“Privately, the valuation can be whatever, but once it’s going public, investors need at least three years of audited financial statements to assign it a fair value.”
Growth-stage and public market investors will also be looking at other listed tech and banking businesses to assign a valuation — and the picture isn’t pretty.
The tech-focused Nasdaq lost a third of its value in 2022 and Nasdaq-listed challenger bank Nubank’s shares have fallen almost 9% this month in the wake of the SVB and Credit Suisse news.
“If the US challengers get hammered [by customers withdrawing deposits] — given what’s happening there with banks — that will be really bad for European challenger banks,” says Radboud Vlaar, managing partner at Finch Capital.
“It complicates an IPO route, as they’d most likely need to go via the US,” he adds.
Revolut will likely do all it can to avoid having to fundraise and “mark to market” for as long as these jitters last.
A spokesperson for Revolut says the company does not engage in speculation on its valuation and that secondary sales are only permitted by Revolut's Articles of Association in limited circumstances.
Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here.