Revolut receives UK banking licence, but reasons to remain sceptical

Revolut’s ‘restricted’ licence has been granted to an empty subsidiary. The current UK E-Money Institution (EMI) remains the entity serving, owning, and holding all nine million UK clients. Only after full authorisation can Revolut serve UK clients as a bank. The Prudential Regulation Authority (PRA) of the UK has agreed with Revolut to categorise the company as a ‘mobilisation stage’ candidate for a potential fully authorised UK banking licence.

Revolut, founded on 1 July 2015, has 45 million users internationally and first applied for the UK banking licence in January 2021. Putting Revolut into mobilisation stage can be perceived as much an insult as an achievement.

Implications of authorisation with restriction status

The PRA has granted an authorisation with restriction status (AwR) to Revolut's empty entity. This means the subsidiary is currently not allowed to take deposits, with a maximum allowed amount of GBP 50,000 ($64,000) for the entire bank, nor to build a loan book. AwR status can be maintained for a maximum of 12 months, after which the application for a fully authorised banking licence is granted or rejected.

The PRA prescribed that Revolut must improve in multiple areas before granting full authorisation within 12 months. These include hiring staff, enhancing IT infrastructure, increasing capital and liquidity, improving corporate governance, and implementing robust risk control measures.

Financial risks and IT challenges

Revolut’s transition from an EMI to a fully authorised bank involves considerable challenges and costs. Revolut is the victim of its own success in the crypto universe. A significant portion of Revolut’s income comes from fees and commissions (72% in 2023) and much of this is related to crypto. Additionally, the transition entails significant operational and financial investments, potentially affecting profitability.

Founder Nik Storonsky’s plan to sell $500 million of the equity he currently owns further complicates the situation, as it introduces market uncertainties and scrutiny, especially with a later potential initial public offering (IPO) linked to the UK banking licence.

Revolut faces additional challenges related to its existing IT infrastructure and organisational complexity. The risk of becoming a 'neolegacy'—where technology becomes outdated—could impede its transition to a traditional banking model. Concerns about the quality of Revolut’s balance sheet, including increasing credit losses and transparency issues around crypto assets, raise questions about the advisability of its transition.

Compliance and regulatory hurdles

Revolut has been facing a tsunami of compliance requirements anyway, but now comes the long list of compulsory improvements the PRA prescribes for the mobilisation period. In the European Economic Area, Revolut Bank UAB is facing upcoming Payment Services Directive 3, Payment Services Regulation, as well as Financial Data Access Regulation. Additional potential sanctions and secondary sanctions related to crypto can also have consequences.

Revolut has been a champion of parallel product-market expansion. As a result, in some jurisdictions beyond Europe, it is now facing changing regulatory landscapes for direct credit entities, robo advisors, and prepaid payment instruments. There are concerns about an overburden of regulatory obligations, especially as Revolut has experienced high exit rates in sensitive compliance positions.

Revolut, as an iconic UK EMI, has a history of occasional late filings, audit difficulties, as well as safeguarding interpretation and compliance issues. In this regard, the Financial Conduct Authority (FCA), not the PRA, has been the primary supervisor. The PRA’s rigorousness in the mobilisation stage could have adverse spillover effects on Revolut’s standing and reputation as an FCA-supervised EMI. The Financial Services Compensation Scheme will also scrutinise Revolut as it moves towards collecting classic bank deposits, with concerns about fragmented deposit insurance regimes in the EU.

Conclusion

Revolut is one of the beacons of the global digital banking revolution, embodying the metaphor of its own brand name. While paying the highest degree of appreciation to this remarkable company, it is important to remain alert and remember that revolutions often devour their own children.

David Gyori is the CEO of Banking Reports, providing strategic advisory services and training programmes to boards and executives of leading banks internationally. He is an advisor and international resource director at The Asian Banker.