Shortly before Covid-19 was declared a pandemic in March 2020, Revolut was knocking through the floors of its London headquarters to improve its rapidly-expanding office. A week later, the UK digital bank was writing to customers to reassure them it would not go bust.
As the crisis quickly sent markets into turmoil and shut economies, the chief executive of rival Monzo took to Twitter in an attempt to calm nerves. Another digital competitor, Starling, announced it would furlough dozens of employees, only to quickly reverse course.
After years riding a wave of investor enthusiasm that enabled them to focus on winning customers at the expense of profits, the pandemic forced Britain’s three largest digital banks to cut costs and rapidly find new income streams.
At their nadir last April, revenues at Revolut and Monzo both dropped by around 40 per cent, as card transaction fees, particularly from foreign travel, dried up.
Nik Storonsky, Revolut chief executive, said: “Quite a lot of people — they didn’t panic, but they started to ask ‘what can we do?’ We all focused on cutting costs and improving the product, and the result was six or seven months in we started to break even as a business. We cut costs, risk management was improved significantly, and we continued growing.”
A year into a crisis that at one point seemed to threaten their very existence, all three companies are back on the offensive — even if their London offices are still mostly empty.
Since the end of February, Starling Bank and Monzo have raised fresh cash to fund expansion, while Revolut has rolled out its regulated banking service in 10 new countries and applied for a further banking licence in the US.
The quest for profitability
But while they have all reduced losses or achieved at least temporary profitability, the three are still fighting to prove to investors — and each other — that they have picked the best long-term approach.
“I think you have a continuum of different business models,” said Starling chief executive Anne Boden. “On the one hand you’ve got Revolut where the business model is not about being a bank really . . . and then at the other end you’ve got Starling, which is really much more focused on providing a whole range of things people need to carry out their daily financial lives . . . We have been less impacted by the crisis.”
Boden, a former executive at UBS, Royal Bank of Scotland and Allied Irish Banks, has the most traditional banking background of the three fintechs’ founders, and Starling has come closest to following a traditional banking model.
The company launched with an app-based current account for consumers in 2017, but in recent years has increasingly focused on its service for small businesses. Starling has now lent more than £2bn to businesses, and has been profitable since October.
However, the vast majority of the lending was done through rescue schemes the government set up during the pandemic, meaning Starling is exposed to minimal risk and in many cases was not required to carry out regular risk assessments.
Boden insisted there was still “a lot that can be learned from going through the process”, and said customers who had received the loans would remain “extremely loyal to us”. Not everyone is convinced.
“If [the rescue loan scheme] hadn’t existed, they wouldn’t have a billion pounds worth of loans,” said the chief executive of one older bank. “A strategy is meant to be sustainable — this is just tactical because CBILS here will stop . . . I wouldn’t be gloating about it.”
While Boden claimed Starling’s focus is a key strength, and criticised firms that “haven’t decided what they want to be when they grow up”, Storonsky argued that Revolut’s broader range of products had proven an advantage.
Besides its basic current account — which is a full bank account in some European countries but not in the UK — Revolut offers services such as stock and cryptocurrency trading, and a business banking operation that Storonsky said “doesn’t get enough attention”.
“I think we are much better for the consumer, because in one app you have everything,” Storonsky said. “And from a business point of view it makes Revolut better, because we are much more diversified in terms of revenue.”
The boom in retail investment and surging cryptocurrency prices has been welcome; at its peak between December and January, the company opened 300,000 new cryptocurrency wallets in a month. The trading bonanza helped it start turning a monthly profit for the first time in three years.
Revolut says it has been profitable each month since November, though it expects to slip back into loss as it invests in further expansion. The last time the company was similarly profitable coincided with a boom in cryptocurrency trading in late 2017, but the trend did not last.
Unlike his counterparts at Starling and Revolut, Monzo chief executive TS Anil does not explicitly address his rivals, but repeatedly stressed that his company had focused on “sustainable” revenue streams.
“We’re here to build this for the long term — we’re not building a business that only looks good for the next six or nine months,” he said.
Monzo warned in its annual report last summer that uncertainties created by the pandemic cast doubt on its ability to continue operating as a going concern, and it has yet to break even on a monthly basis.
Despite having a full banking licence — and the high regulatory costs that come with it — many Monzo customers used their accounts for precisely the sorts of discretionary spending that were curtailed by the crisis, from after-work drinks to overseas holidays.
Now, however, people familiar with the matter said the bank expects to be profitable in the next 12 months, assuming the UK economy recovers in line with forecasts.
Anil said revenues are 30 per cent higher than they were before the pandemic; the growth was helped by new products such as premium accounts, but transaction fees have also rebounded despite the lack of travel.
The increase in fees reflected more customers using Monzo as their main account, and highlights a trend that all three fintechs expect to benefit from — a broader shift in consumers’ willingness to rely on entirely digital services.
A pandemic silver lining
Executives at mainstream banks have long argued that, while customers may enjoy fintechs’ flashy apps for day to day use, they appreciate the security and human interaction of high street banks when they run into complicated issues or need to make big decisions such as taking out a mortgage.
The coronavirus, however, has forced some branches to close permanently, and encouraged many more people to get used to digital operations in all areas of life.
Anil admitted the company still has some way to go — customers using Monzo as a primary account are still in the minority — but said the long-term trend will force big banks to compete with fintechs head to head on the quality of their digital service.
“That’s a huge secular tailwind that will undoubtedly benefit us,” he said. “Profitability will come, but it’s just one important milestone along the way.”