October 07 2019

Revolut partners with Visa in global expansion effort

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UK-based Revolut is the one of the world's most valuable challenger banks with a valuation of US$1.7 billion. With seemingly unlimited coffers of venture capital to draw upon, the company is targeting a $10 billion valuation in the next few years. Its executives say that the company would need to be valued at US$20 billion or more before it would consider going public.

Revolut's backers are pouring money into the company because they believe it is pioneering banking of the future: digitally native, frictionless, having a minimal branch network (and thus a more competitive cost structure than traditional retail banks) and a stronger focus on niche customer segments underserved by incumbents. Currently, Revolut offers foreign exchange, stock and crypto brokerage services, plus peer-to-peer payments.

Revolut recently announced a deal with Visa that will support the fintech startup's ambitious global expansion. Visa will enable Revolut to launch in 24 markets outside of the virtual bank's Europe base, according to a statement issued by the two companies in September. The first wave of launches will occur in Australia, Brazil, Canada, Japan, New Zealand, Russia, Singapore and the United States. Next will be other major Latin American and Southeast Asian markets as well as Saudi Arabia, South Africa, India, Korea, Hong Kong and Taiwan.

"With Visa being accepted at nearly 54 million merchant locations across more than 200 countries, we have the scale, experience and expertise to help fintechs like Revolut go global," Jack Forestell, chief product officer, Visa's chief product officer, said in the statement.

For Visa, the symbolism of the deal matters: By partnering with one of the world's hottest fintechs in a large international expansion effort, the card giant telegraphs that it is thinking digitally. Otherwise, as Quartz recently pointed out, Revolut's 8 million customers don't offer Visa a whole lot at the moment. Visa already has a card network 3 billion strong that processed $11.2 trillion in transactions last year.

Unsurprisingly, Revolut's mounting losses didn't stop Visa from inking a deal with the company. In the land of unicorns, valuations are based not on profitability, but on the potential of posting a profit in the future. In 2018, Revolut booked a £32.8 million ($40.3 million) net loss (more than double what it lost in 2017) on revenues of £58.2 million. While revenue rose 354%, it wasn't enough to offset surging costs.

Of course, when the objective is to expand at a torrid clip, money gets burned, even without the added costs of a physical branch network.

Revolut's leadership has shown a somewhat dismissive attitude towards profitability, not unlike its counterparts at Germany's N26. “The whole idea was we provide the product for free, then we cross-sell other services. So we just need to have large customer numbers," Revolut CEO Nikolay Storonsky told CNBC in July.

That's definitely a novel concept for banking, but it's becoming commonplace among fintechs flush with VC money.

Richard Davies, Revolut's chief operating officer, explains the company's prospects a bit differently. "We’re generating a good contribution from each customer. Then you’ve got an active choice about how much you want to invest in continuing the growth," he told The Financial Times.

Revolut's executives say that the company wants to become the Amazon of banking (through "disruption," naturally), but the analogy is flawed. Amazon arrived at a time before most retailers had a strong digital presence. That's not true for banking today. Regulatory hurdles were less challenging than in the financial-services sector. Nor were there the trust issues that come with finance. It's one thing to buy a book from Amazon instead of in a Barnes & Noble store. It's another to let a plucky, loss-making fintech manage your money rather than an established, profitable bank.

In Revolut's case, the biggest banks are already online, some with good apps. Some have loyalty programs that offer perks similar to those that come with Revolut's subscription services. Moreover, there are VC-backed challenger banks everywhere with similar products to Revolut's - if not exactly the same. Under this scenario, it's hard to fathom Revolut emerging as a digital banking juggernaut akin to Amazon in e-commerce.