Revolut triples valuation even as scrutiny over neobank profitability grows

Co-founders Vlad Yatsenko and Nikolay Storonsky.
Co-founders Vlad Yatsenko and Nikolay Storonsky.
Image: Revolut
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Financial startup Revolut says it raised $500 million in a deal valuing the company at $5.5 billion, making it one of the world’s most valuable fintechs. The transaction comes amid growing scrutiny over the ability of next-generation digital banks to turn a profit.

The transaction tripled London-based Revolut’s last valuation and brings the total amount of capital the firm has raised to $836 million. “Going forward, our focus is on rolling-out banking operations in Europe, increasing the number of people who use Revolut as their daily account, and striving towards profitability,” CEO Nikolay Storonsky said in a statement.

The deal, led by venture capital firm TCV, has been one of the worst kept secrets in the UK’s burgeoning fintech scene, with sporadic news reports about the fund raise emerging for more than a year. A spokesperson for Revolut said the investment wasn’t truly a focus until the end of 2019. Revolut said it was in fact an “extremely quick turnaround given the amount we have raised.”

The 5-year-old company says it’s focused on further developing its financial platform—a single app where users can manage their daily finances, from foreign-exchange for travel to budgeting and stock trading. Revolut aims to make money through a freemium model in which some services are free and a subset of users sign up to receive premium offerings. It also plans to add lending for business and retail customers.

Investors have grown more cautious of consumer startups of all stripes after a series of lackluster tech IPOs from largely unprofitable companies in 2019. That’s making things like path to profitability more fashionable among entrepreneurs and venture capitalists, and skepticism has been particularly pronounced for larger, later stage transactions.

Some investor ebullience for financial upstarts has also have burned off, as many continue to lose money (most fintechs in the UK reported wider pre-tax losses in 2019 than the year before, according to a recent report from consulting firm Accenture). Revolut net losses (pdf) more than doubled to £32.8 million ($42.4 million) in 2018, the most recent year that data is available. The company mentioned the word “profitability” twice in today’s statement without providing a timeframe for getting there.

Getting customers to use Revolut as their main financial account is an important hurdle. Revolut says it has more than 10 million users around the world, but it’s less obvious how many of those customers generate money for the company. Like other new wave fintechs, Revolut touts customer numbers that seem more useful for a social media company than a financial one. The company said the number of daily active users increased 380% in the past year, and that its premium subscriptions grew 154%, without providing more context.

There are signs that this new generation of banks native to mobile phones are stalling when it comes to growing their deposit base—an important metric for financial companies. UK-based neobanks say they have more than 19 million customers, almost three times as many as a year ago, according to Accenture. But deposits have stumbled, dropping to £260 per customer in the second half of 2019, compared with £350 during the previous period.

Revolut has also weathered a series of negative headlines that suggest the company was prioritizing growth over other concerns. In 2018, the company was dinged (paywall) by media reports insinuating that its anti-money laundering controls weren’t stringent enough. More recently, several media reports have been published concerning customer complaints about frozen accounts.

A Revolut spokesperson said only a small number of its customers experience account suspensions. “This could be due to either a breach of our terms and conditions or as part of our security checks which continuously monitor to keep our customers safe,” the spokesperson said. “This measure is a regulatory requirement. We know the impact this can have on our customers and will always work to reopen accounts as quickly as possible, where appropriate.”