A new bank in town: the approval of Revolut’s banking licence
On the 24th July, the global fintech company, with over nine million UK customers, officially received its UK banking licence, years after it first applied. Whilst Revolut securing a licence is a positive step towards the liberalisation of banking and giving the average person greater freedom of choice, this begs the question as to why this has taken so long.
The news about Revolut’s banking licence approval has been met with great support for diversifying the current banking market, however, the addition of a singular bank falls short of neighbouring countries, such as Germany. The German economy benefits from the thousands of licensed banks compared to the five banks that make up Britain's banking and financial services, making the UK’s banking network one of the most homogeneous in the world. The small number of banks available to the general public has somewhat monopolised the arena for which the average consumer in the UK has very limited choice. In fact, the five leading banks—Lloyds Banking Group, RBS, HSBC, Barclays, and Santander—have an 85% share of the personal current account market, illustrating the limitations for the consumer.
Revolut, who has 45 million worldwide customers, already had licences in Lithuania and Mexico. It now hopes that the UK’s approval will help it to expand its activities in key markets like the US and Australia. It had filed a licence application back in early 2021 but had faced substantial setbacks. The reasons stated included trouble with revenue verification, following delays to the 2021 and 2022 accounts being released, as well as the departure of senior executives and the ownership structure. The entry of Francesca Carlesi, former Deutsche Bank executive, into the company’s leadership back in November has helped subdue the technocrats at the Prudential Regulation Authority (PRA). While there is the argument to be made that filing an earlier application, when the company had been much smaller, which may have helped it secure its licence faster, the argument fails to remove the fault resting on the overly stiffened bureaucracy taking so long to approve one of the most trusted Electronic Money Institutions in the UK.
The company differs from more traditional banks in its focus on primarily online banking - a move which has drawn customers through its accessibility and ease of entry. It is in talks to sell $500mn worth of shares in the hopes of boosting its market valuation from $33bn (as valued in 2021) to $45bn - a move which, if successful, might make it a contender for third place among UK banks, replacing Barclays and being only surpassed by HSBC and Lloyds Banking Group. However, there are growing concerns that the current macroeconomic environment, with a drop in interest rates expected soon, might reduce Revolut’s profits. Considering the fact that interest income had accounted for over a quarter of the company’s revenues last year, this may pose worries.
The three year wait for Revolut’s licence exemplifies the red tape delays in the British banking market produces and, despite the longevity of the wait, the licence provided comes with significant restrictions, meaning that new products from Revolut will be unable to be launched, further limiting the choice of individuals. The Bank of England’s suggestion for the movement into the mobilisation stage, provisioning a conditional phase allowing for finalisation of the IT infrastructure, governance, and risk management frameworks. Revolut must attempt to secure further investments but in the meantime this phase allows greater protection of the Financial Service Compensation Scheme (FSCS) for customers. It must be noted, that the provision of the mobilisation phase does not allow for the complete success of the liberalisation of the financial sector, rather further illustrates the struggle that innovative banks face in licensing agreements.
Whilst Revolut’s licensing has the potential to benefit UK customers, protecting their money, the need for greater removal of red tape around regulation on businesses is essential to economic growth, with the overcomplicated nature of the regulation strangling businesses and growth in markets. The need to reassess British financial markets is becoming ever more obvious and therefore necessary to boost the economy through greater competition between a multitude of banks and attract greater investment, something which the government’s slow pace of reform is limiting.
