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How Revolut's "Profits" Tripled When Its Losses Doubled
Visa Buys Tink, Fintech Charter Truce, Citi BNPL, Goldman Launches TxB in UK
Hey all, Jason here.
You’re not alone if you can’t keep up with everything that’s happening in banking and fintech. Not a week goes by without a nearly unfathomable number of product launches, acquisitions, and fundraising announcements.
The deluge of news means some developments don’t get the attention they deserve — a problem solved by this month’s Fintech Nerd Collective, where a group of practitioners, thinkers, and writers (including me!) answered the question: What are the most under-discussed trends in consumer fintech?
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How Did Revolut’s “Profits” Triple While Losses Doubled to £207 Million?
There was a bit of confusion as Revolut reported its 2020 accounts last week. The headline in London’s City AM pronounced “Revolut’s profit triples to £123m, as appetite for fintech swells,” whereas other outlets like Sifted and the Irish Times led with headlines like “Losses at Revolut double to £207m as revenue growth slows.” (City AM quietly updated its headline without any note of the change; you can see the original headline as syndicated on MSN Money.)
A quick look at Revolut’s 2020 annual report helps explain the confusion. The report heavily features what Revolut refers to as “alternative performance measures.” The metrics featured front and center on the sixth page present a rosy picture of growing revenue and profit sharply up vs. 2019:
It’s only when you refer to the appendix that contains more detailed definitions that you can understand what these metrics are measuring. For instance, “gross profit” is defined as (emphasis added):
“Gross profit/gross margin: Gross profit is defined as adjusted revenue (including revaluation gains on cryptocurrencies) less direct costs, excluding net onboarding costs. Gross margin is defined as gross profit divided by adjusted revenue (excluding onboarding income).”
The excluded “direct costs” are defined as (emphasis added):
“Direct costs primarily relate to fees incurred by the Group in the processing and settlement of transactions, the costs of providing cards to customers and the costs of any redress payments made to customers who have been the subject of fraudulent transactions. This is net of rebates received from payment scheme providers for scheme fee costs.”
…and the excluded “net onboarding costs” are defined as (emphasis added):
“Net onboarding costs represent the net costs of opening new customer accounts, including the cost of production, delivery and activation of customer cards, and is net of fees charged to customers for the issuance of new cards.”
So, “adjusted revenue” was marked up, based on the increased value of (highly volatile) cryptocurrencies, while “gross profit” excludes most costs related to acquiring and servicing its customers. Looking at the more detailed financial statement, it becomes clear that revenue was inflated by £38.6m while costs were deflated by £166.8m.
And voilà, £123m “gross profit” despite a £200m operating loss (the £207m number includes interest expense):
While it’s not uncommon for emerging, novel business models to argue that traditional GAAP metrics aren’t the best measure of their performance (think SAAS businesses), banking is far from a novel business model.
The decision to highlight these “alternative” measures is particularly confounding, given Revolut is in the process of applying for a California bank charter and the FDIC insurance it would need to hold insured consumer deposits in the US. I don’t imagine those regulators are too fond of this type of creative accounting.
Multiple Features Drive Revenue, but Still Primarily From the UK
There are a handful other interesting morsels in the annual report. Compared to US neobanks, which are highly dependent on interchange income, Revolut isn’t overly dependent on a single source of revenue, and derives a meaningful ~34% of revenue from subscriptions:
In 2020 the company did, however, remain highly dependent on the UK for the majority (88%) of its revenue. Revolut’s geographic diversification did improve from 2019, when 99.8% of its revenue was derived from the UK.
With its aggressive geographic expansion, I’ll be curious to see what this breakdown looks like in Revolut’s 2021 annual report:
OCC and States Reach Fintech Charter Truce — For Now
The OCC and the Conference of State Bank Supervisors (CSBS) have agreed to a 90 day stay in the CSBS’ case contesting the OCC’s authority to approve a unique charter application from Figure Technologies. The development isn’t necessarily good news for the future of a non-depository “fintech charter,” however.
Acting Comptroller Michael Hsu has previously indicated the OCC would undertake a thorough review of all pending and conditionally approved charters, though those comments were primarily concerning national trust charters for crypto firms Anchorage, Protego Trust Co., and Paxos.
On the fintech charter front, there’s a bit of a catch-22. In other cases brought by state regulators against the OCC’s proposed charter, judges said they could not rule, because none such charters have yet been issued. Fintechs are unlikely to pursue such a charter, knowing legal challenges to it are virtually guaranteed.
Figure’s unique approach — applying for a traditional national banking charter but not FDIC insurance, as it won’t hold insured deposits — is widely viewed as a proxy for the proposed national fintech charter.
This may all be moot, as Hsu has expressed a more cautious and consensus-driven approach to fintech chartering than previous Comptrollers. In written testimony in May, Hsu stated (emphasis added):
“With regards to charters, some are concerned that providing charters to fintechs will convey the benefits of banking without its responsibilities. Others are concerned that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators. I share these concerns. Recognizing the OCC’s unique authority to grant charters, we must find a way to consider how fintechs and payment platforms fit into the banking system, and we must do it in coordination with the FDIC, Federal Reserve, and the states.”
Sen. Sherrod Brown Still Pushing FedNow Accounts, Subsidies for Small Banks
Ohio Senator Sherrod Brown (D-OH) is doing the rounds to advocate for his bill that would offer all consumers no-cost bank accounts held directly at the Federal Reserve.
Brown’s proposed bill would require Federal Reserve member banks to offer the accounts, as well as making them available via US Post Offices. He recently told American Banker (emphasis added):
“It’s getting harder and harder for small banks to compete for new customers when big tech companies can afford to spend billions on marketing and technology,” the Ohio Democrat said in statement to American Banker. “Under my proposal for no-fee accounts, small banks would be reimbursed for the operating costs of providing these accounts, giving them an affordable way to attract and retain new customers for the long run.”
The proposed mandate to offer these accounts with full reimbursement of costs from the federal government reads like a bit of a boondoggle for small, local banks. Instead of updating business models and cost structures that increasingly don’t make sense, Brown wants to give small banks a de facto subsidy.
While banking historically has been a local and thus branch-based affair, that has been changing since the late ‘90s, a trend that has only accelerated and is virtually certain to continue. If smaller banks are relying on their physical proximity to customers as their core differentiator, their future doesn’t look great.
The bill’s proposed measures also fly in the face of changing consumer preference. According to FDIC survey data, the primary way people manage their accounts unsurprisingly has been shifting from branch-based banking (teller+ATM) to digital (online+mobile):
To some extent, this proposal feels like a solution in search of a problem. While about 5% of American households ARE unbanked, most of those households aren’t interested in becoming banked.
Further, there are an increasing number of private market options that do a good job of meeting the needs of these consumers — including options available through the bricks and mortar branches of establishment banks (no government subsidy needed).
Citi Rolls Out BNPL in Competitive Aussie Market, Offers Merchants Lower Costs
Citibank’s Australia division, which is in the process of selling its consumer business, is launching its own buy now, pay later offering via Mastercard. Australia is arguably one of the hottest BNPL markets, with numerous homegrown offerings like Afterpay and Zip, which have expanded to other geographies.
According to The Australian Financial Review:
“The new business will give customers access to as much as $1,000 initially to be repaid in four instalments over six weeks. For a small fee, consumers can access longer-term repayments or larger lines of finance.
Customers will be able to use the new service wherever Mastercard is accepted, locally or offshore, and they will be able to link the service to any deposit account.”
Citi plans to appeal to merchants by taking a smaller share of each transaction paid for via BNPL. Afterpay charges merchants $0.30 + 3-7% of each transaction, whereas the merchant discount rate for credit card transactions in Australia is typically 0.6-1.5%. It’s not immediately clear from the announcement what the Citi BNPL offering will charge merchants, other than emphasizing it’s less than current market leaders.
The offering, if successful, could signal the beginning of downward pressure on the prices BNPL providers charge merchants — eroding their margins and potentially crimping earnings and share prices.
Goldman Expands Transaction Banking to UK
One year after it launched transaction banking in the US, Goldman Sachs announced it has extended that offering to the UK. Like its Marcus retail unit before, transaction banking was a greenfield opportunity for the firm. Within a year of launching in the US, Goldman says its transaction banking offering has attracted 250 clients with $35 billion in deposits.
In the US, Goldman has taken multiple routes to market, serving transaction banking customers directly as well as making its APIs available via Stripe Treasury (still invite-only), which allows Stripe’s customers to embed banking functionality into their products. Stripe partners with Citi and Barclays to provide the service in other geographies.
It’s unclear if, with Goldman’s launch of UK transaction banking, the partnership with Stripe will be extended to include the UK.
Visa to Acquire Europe Open Banking Startup Tink for $2.2 Billion
If at first you fail, try, try again.
Visa seems to have taken that advice to heart, announcing plans to acquire open banking platform Tink just six months after the Department of Justice scuttled its attempted acquisition of US-focused bank data aggregator Plaid.
For those unfamiliar, Tink is a European-focused open banking platform. According to Reuters:
“Sweden-based Tink enables banks and other financial firms to share and access consumer financial data more easily. It is used by more than 3,400 banks and other institutions, as well as over 250 million customers in Europe.”
Like in the US market, the main benefit of Tink is that a product or service that wants to leverage bank account data can build a single integration with Tink, rather than thousands of integrations with individual banks. While acquiring Tink will give Visa good coverage in the EU and a solid technology platform, it doesn’t come with the coverage of US financial services providers that Plaid would have.
The open banking / bank data aggregation ecosystem in the EU / UK are considerably different than the US, owing to a much more active approach to regulation governing consumer data portability. EU regulations require banks to bear the cost of providing secure APIs for sharing customer data. To date, the technological and economic structure of US bank data sharing has been driven by private, market forces (though rulemaking for Dodd-Frank 1033 may change that.)
For an insider’s perspective on Visa’s pending acquisition, I reached out to Rolands Mesters, co-founder and CEO of Nordigen, a Tink competitor that offers a free open banking data API:
“Open banking has proved to be incredibly disruptive to several industries all at once. What started as the ability to access banking data using screen-scraping in the late 90s, has grown to be a meaningful alternative to payments rails, credit bureaus and identity documents. The latest acquisition of Tink is an example of how incumbents can overcome their own Innovator’s Dilemma, and I’m certain we will see more incumbents buy their way into open banking to not be replaced by the new technologies.
What I personally want to see is how Visa will make open banking more accessible in Europe. It’s a bit of a mess right now. PSD2 APIs are free to use and most of the heavy lifting on the technology side is done by banks. Meanwhile, all API aggregators in Europe are still charging high fees for access to data and payment initiation.
We launched our own free open banking API with the hope that others will follow. It would be game-changing if Visa did this as well - it would certainly accelerate the rate at which traditional payments, credit data and identity verification technologies are disrupted.”
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Other Good Reads This Week
Banks Slowly Offer Alternatives to Overdraft Fees, a Bane of Struggling Spenders (New York Times)
Who Will Build Consumers a Debt Dashboard? (a16z)
Briefing: Tech in Africa (The Generalist)
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