Revolut’s road to IPO will test fintech’s hype
The neobank’s ambitious expansion comes with renewed pressure on cost
IN TRADITIONAL European banking, where cross-border deals are finally stirring, the question is: “Will they merge?” In the world of fintech, where whizzy venture-backed growth has cooled in the face of increased competition, regulation and a funding drought, it’s: “Will they list?”
For neobank Revolut, the fintech hype looks set to be tested, with co-founder Nikolay Storonsky recently flagging that backers will want an initial public offering “sooner or later”, and that the US looks a preferable listing destination.
Private markets currently value Revolut at US$45 billion, following recent employee share sales, which puts the app in line with current public-market capitalisations of NatWest, CaixaBank and Deutsche Bank. That’s a mark of confidence in a platform that lacks the huge loan books or trading floors of those banks, yet has managed to amass 50 million customers, secure a provisional UK banking licence, and turn a profit three years running. (Though let’s not forget the fraud victims and hacks along the way.) The question for potential investors will be whether Revolut’s fee machine can keep whirring across new geographies and product lines while controlling costs. That’s a hard sell.
The growth part is clearly there: After profitable expansion in 2023, analysts estimate the company’s revenue likely surpassed US$3 billion in 2024, up from US$2.2 billion in the prior year. That would put average annual revenue per user at around US$60 to US$70, and – assuming profit margins hold steady – net income at close to US$1 billion. In this bullish scenario, a US$45 billion valuation starts to look a bit more justifiable at around 45 times last year’s earnings, or 30 times this year’s if those 50 per cent growth rates continue. That’s well above multiples for traditional banks such as UBS, but in line with fintech stocks such as NU Holdings.
This racy growth, driven by Revolut’s core businesses of card payments, money transfers and subscriptions, comes at a cost, though. In a world where most people don’t use the app as their primary bank account, the firm is targeting a bewildering array of new markets and product lines as every new customer and fee pool counts. Revolut’s reported expense ratio – what it spends for each dollar earned – was 44 per cent for 2023, but crucially this excludes the wages of its sales team as well as advertising and marketing costs. Those don’t disappear as a business grows; traditional banks spend a lot on branding. Add those back, and Revolut’s expense ratio rises to 68 per cent.
That’s worse than many supposedly lumbering incumbents, and miles behind the most efficient including names such as Italy’s Intesa Sanpaolo with a cost-to-income ratio of about 45 per cent, or Spain’s Banco Bilbao Vizcaya Argentaria at 41 per cent.
The main advantage of fintech firms is meant to be better and cheaper technology and operations; for Revolut to become even as efficient as these old European banks, it will need not only to keep growing rapidly, but do so while scaling back investment in its brand, and avoid the onerous compliance and regulatory costs that established banks deal with daily. Let’s say the jury’s out on this one.
Rivals and regulators aren’t sitting still, either. Those creaky banking incumbents that were supposed to be swept away by the fintech wave appear to be doing fine: JPMorgan Chase & Co spent a whopping US$17 billion on tech in 2024, and McKinsey estimates that TradFi’s digital brands are winning more retail-banking revenue than innovative upstarts in the US. As for automating away expenses, artificial intelligence might be a game-changer one day, but regulators will always demand that compliance processes and errors are explainable – meaning costlier humans are always going to have a big role to play.
This doesn’t detract from Revolut’s accomplishments in building a profitable core business from its young, international users – and at least trying to course-correct after past mistakes. It’s a turn of events many bankers dismissive of the startup crowd didn’t see coming a decade ago.
But now comes the tough part of lighting a fire of enthusiasm on stock markets at a time when the next decade of growth looks harder to achieve than the last. Neobanks are whizzy and convenient – but that sales pitch alone won’t seduce traditional portfolio managers into replacing the firm’s venture capitalist backers.
