Revolut sets sights on full UK banking license to solve the profitability conundrum

• Revolut is betting that the license’s deposit insurance will drive more customers to make Revolut their primary account.
• But the neobank still must focus on driving engagement with other features.
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The UK neobank applied for a full banking license in the UK, which would allow it to offer overdrafts, loans, and deposit accounts, Bloomberg reports. The license would also guarantee Revolut is covered by the UK’s Financial Services Compensation Scheme, which protects customer deposits of up to £85,000 ($109,000). Revolut currently has an emoney license in the UK, holding customers’ funds in big banks, and a banking license in the EU.

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This mirrors a trend in the US, where fintechs are seeking more operational autonomy via banking licenses. In 2020, Varo became the first fully licensed US neobank. And later in the year, Square obtained FDIC insurance, and SoFi received preliminary Office of the Comptroller of the Currency (OCC) approval for a bank charter, pushing them both a step closer to bank charter eligibility.

A charter from the OCC enables nonbank financial services firms to expand their range of products and eliminate the costs of partnering with a sponsor bank to hold the deposits, which could be particularly beneficial as the pandemic has diminished the use of physical branches and digital banking penetration is on the rise.

Revolut is betting that the license will help it unlock primary account status, which is a key driver of profitability—but a license won’t be a silver bullet.

• A license could give Revolut users the confidence to increase their deposits and conduct more financial activities through the neobank. To lessen their dependence on interchange fees, neobanks are looking to become the primary bank for their customers’ day-to-day expenses, rather than just being used for their debit cards. Revolut believes the deposit protection promised with a full banking license would encourage consumers to do just that: In a survey, the neobank found that 50% of its customers would be willing to deposit their salaries in Revolut accounts if their money was covered by a deposit guarantee scheme. And CEO Nikolay Storonsky told The Sunday Times that a license will allow it to “compete with large British banks because [Revolut] will be providing better services at better costs with deposit insurance.”
• Still, Revolut can’t rely solely on a bank charter to spur users to primary account status, and it should continue incentivizing primary account status in other ways. The neobank isn’t guaranteed success with its license application, and the process could be lengthy. In the meantime, Revolut should look to prime users to integrate more of their financial lives with its platform. It has already taken steps toward this by enabling early wage access for users who link direct deposit to their Revolut account. And it has broadened the platform’s capabilities, including with a subscription management feature and a Pockets money management tool. Continuing to build out its offerings should help Revolut ensure that its UK customers are engaged with the platform and therefore more likely to make it their primary account in the future, regardless of licensing status.

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