Fintech is the great new hope for the post-Brexit City. It is terrific that in recent weeks the profitable payments specialist Wise made a strong debut on the London Stock Exchange, and JP Morgan showed its confidence by snapping up online asset manager Nutmeg.
But there is a danger that investors become too hung up on tech breakthroughs. Potential weak spots at online payday lender Wonga, Wirecard in Germany and, more recently, Greensill were overlooked by financial backers.
Regulators were caught up in the excitement of little understood models.
Fintech champion: Banking App Revolut is headquartered in London but its banking licence, which it is using to passport itself into other parts of Europe, has been granted by Lithuania
One trusts the lessons of these flops have been learned and the next generation of fintech is being closely scrutinised for risk and vulnerabilities.
Even so, the £24bilion valuation placed on Revolut at its latest fund raising this week, placing a value of £577million on the stake of Russian founder Nikolay Storonsky, is cause for pause.
The backing of Softbank, known in the UK for its shrewd purchase of Arm Holdings, ought to provide reassurance.
Softbank also placed its faith in Lex Greensill. The first port of call for anyone trying to understand what Revolut does, and how it is going to make its future profits after making a pre-tax loss of £207,875 in 2020, is the annual report.
A comforting aspect is the line-up of directors, which includes former Standard Life Aberdeen chief executive Martin Gilbert as chairman and ex-Goldman Sachs dealmaker Michael Sherwood. Both offer deep experience of finance.
Slightly more worrying is that Revolut’s banking licence, which it is using to passport itself into other parts of Europe, has been granted by Lithuania.
With due respect to the Baltic nation, it is not known as one of Europe’s leading financial centres.
Encouragingly, the firm is audited by BDO, not a top four audit firm, but at least on the second tier. The value in Revolut comes from explosive growth.
At the start of 2021 it was conducting 150m transactions per month for 15m retail customers and 500,000 business customers, and had operations in more than 35 countries.
So what precisely does it do? There are three main sources of revenue.
The Revolut card, which brought in £95million of revenue; foreign exchange and wealth, responsible for £80million; and a service called subscriptions, which brought in £75million.
The fastest growing sector is forex and wealth where income soared 150pc last year. We know from Wise how fintech is revolutionising access to foreign currency by displacing the clunky systems used by the big commercial banks and eliminating the ‘turn’ on exchange rates.
The wealth aspect of Revolut looks fascinating. Crypto-currency dominates this part of the business and the annual report is dotted with the world ‘crypto’ which appears almost 90 times. There is also involvement in trading precious metals.
Crypto had an amazing run in 2020 but this year has generated regulatory scrutiny. UK regulator the Financial Conduct Authority has warned neophyte investors of the dangers of being too exposed to bitcoin and the like because of extreme volatility.
That’s before one even considers how the Wild West of crypto has become a fiefdom for scammers and money launderers.
Revolut’s subscription service, administered by an app, is a good tool. In an age when we are all loading down subscriptions, sometimes inadvertently, the device keeps track and offers one stroke cancellation.
As useful as this may be, as commercial banks adjust to the online world, it won’t be difficult for them to add a similar service, including instant cancellation.
For most established financial players, adding one or two new products a year and getting the model right may be considered sufficient innovation.
Revolut is much more ambitious. It lists one dozen new products added in the last year, ranging from gold and silver trading to four new crypto currencies.
All this is amazingly dynamic but it must be a nightmare for Lithuanian and other regulators seeking to keep track of what is happening under the bonnet.
The accounts show Revolut holds a safety net of £538million of cash for regulatory capital and liquidity purposes.
Moreover, some £5billion of ‘restricted cash’ is in the safeguarded accounts of central banks and other banks. Customers should be grateful for small mercies.