Breaking Down Revolut, Starling and Monzo’s Annual Results
Today, we’re joined by Lex Sokolin to break down the recently published annual reports from Revolut, Starling and Monzo, three of the leading European digital banks.
There are some fascinating insights to be drawn from the documents, especially in the context of the broader global fintech market.
This is rich subject matter, and we surely didn’t cover everything. You may even disagree with our analysis! Let us know.
Please get in touch with thoughts, opinions and corrections. We’ll share all the high quality communication we receive with the entire community.
To subscribe to the Rebank newsletter, including insights, essays and written transcripts of all new episodes, please visit rebank.substack.com.
To subscribe to Lex’s amazing newsletter, please visit www.fintechblueprint.com.
Thank you very much for joining us today. Please welcome, Lex Sokolin.
Full transcript:
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
Hi, Will, good to be back.
Will Beeson:
It's a pleasure as always. I thought that a fun topic to dig in today, fun for us, maybe for our audience, probably not for normal people, would be to dig into the recently released annual results of the three best known, earliest UK digital banks, Monzo, Starling, and Revolut, who get compared to each other mostly based on geography, I guess some personal rivalries at those companies, and then also I guess for the convenient fact that they release their annual results at more or less the same time.
Lex Sokolin:
That's the nice thing about being in the UK, that you've got no choice but to show your cards even if you're a private company.
Will Beeson:
Yeah. I was thinking about that. So there's definitely that, and then part of it is surely the fact that as a regulated institution, if you're a bank, certainly there are disclosure requirements, all the Pillar 3 annual statements and various things. Revolut, it doesn't sound like, they're not a UK bank, didn't even sound like from their results that they're actively passporting the EU banking license into the UK, but they are an e-Money issuer and generally regulated. So we'll have some disclosure requirements. And then the likes of Monzo and Starling from the very beginning taking a transparency approach to how they run their businesses, which I think especially in Monzo's case has been strong community asset. They've been forced to be pretty transparent lately, they've been in the news a lot, and we've probably referenced them on the podcast a few times lately. Had some management changes, all these companies have raised money, some at higher valuations than before, some flat, some lower.
Lex Sokolin:
It's like yeah, the ocean's wet, Revolut's raised money.
Will Beeson:
Right. But yeah, rather than dig line by line because geeky listeners if so inclined can do that themselves. I thought we could just talk more high level about what seems to be working and what isn't and also draw any relevant comparisons to other successful companies in the market. I guess to start, at the very highest level, there are some flashy numbers that get reported, people love talking about, number of customers, certainly valuation, but let's set that aside because that's not really the focus of the conversation, number of customers which is great except no one gives all that much clarity as to who's an active user versus who maybe saw a billboard once or downloaded the app and has never really used it. Though reading between the lines, you can tell that Starling customers are more engaged and use Starling more as a main bank, keep more deposits there than the others.
Will Beeson:
And I guess that makes sense in terms of their positioning and it's a strategy that eventually leads to slower customer growth but potentially better economics. And we can probably get into that conversation about whether it's better to focus on user growth at the expense of economics or focus on economics at the expense of user growth, which I think there's actually a pretty clear answer to. But before we go much further, love to step back and let, pass the mic to you for a sec and ask if there are any high-level takeaways from your review of these reports.
Lex Sokolin:
So it is really interesting to see under the hood because we just aren't used to getting the pre IPO information out of companies in the U.S. very much. So for any entrepreneur or investor, it's really a fantastic resource to sanity check whether this is the new Amazon being built or something that's struggling much more. And I do think there are, Starling, Monzo, and Revolut are totally different companies even though in their comparison people will talk about very similar metrics. I do think it's important, for example, to anchor that Starling has about a million customers, about 80,000 of those are small businesses. Monzo's got, coming up on four million customers, most of whom are retail. And then Revolut has the largest retail footprint at around 10 million and then they also have a business banking type offering but that also has a bunch of users but we don't know how active they are.
Lex Sokolin:
So Revolut's the biggest footprint, Starling's you could say the most focused on a sustainable business. And then in terms of the actual assets, there's actually not that much difference between them, it's a couple of billion. So one talking point I'd love to bring up to embarrass these guys is there are hundreds and hundreds if not thousands of banks in the U.S. with a billion dollar deposit base. And so from a really traditional perspective, these are all still very small banks. And what that means is that the average size of an account is little and that's true in other fintech categories, so Acorns the micro investing app the average account size is going to be $250, $500, pretty small. And that's also what you see with these neo banks is that they're not where you put your direct deposit, they are where you keep 200 quid, in the case of Starling, it might be a thousand quid on average. So it's a much more transient and in some ways more modern in that way experience.
Lex Sokolin:
So the reports for me really reinforce this point before even going to profitability or anything else, they reinforce this point about all these banks or bank apps really need to get more economics from each customer. And so the final point, and I often said this before and done the back of the envelope math is that if you look at the unicorn valuations of these companies, they are pricing on a per user basis valuation somewhere like $1,000 to $2,000 in enterprise value per user. So you take the whatever it is, 5 billion, 10 billion divided by the number of customers and you end up with $1,000 per user valuation. The reality is all of these companies are making 20 to 30 bucks a year per customer. And so for me that's the core existential question is how do you go from 30 bucks a year per customer in revenue probably at a loss to 1,000 bucks per customer in enterprise value?
Will Beeson:
Yep. I think that's a great question because it encapsulates so much of the analysis, the strategy, and the conversation around these companies, around this broad business model of digital banking and what the future holds for the industry. I think it's an important point. It looks like if you just do simple math, revenue at these companies divided by number of customers, you get to somewhere between £20 or £25 per customer in revenue for the most recent financial year which is not zero but it's also not significant especially if you compare it to an incumbent bank. I guess we could have another conversation some other time as to whether traditional banks are the right comparison for these models in 10 years, maybe that conversation would be totally different. But incumbent banks make a lot more than that per user. And of course, they make more than that because they charge them fees. So on one hand it's good that there are lower revenues per customer. And in fact the whole premise is that these banks, any digital bank built on new technology much like any business in any sector can be profitable with less revenue per customer because their operating costs are so much lower. Now from a technology and infrastructure standpoint, that's true. From a corporate governance overhead capital standpoint, it's not true at all. And if you're a bank, if you're one of these new banks and you're actually an authorized bank, at least in the UK, you're looking at capital requirements that are probably twice what an incumbent would be forced to carry. And there's some good reasons for that because there's more operational risks associated with you as a newer business, you have less of a solidified footprint and customer base, perhaps you have higher flight users in the event of some sort of financial distress or economic downturn.
Will Beeson:
But nonetheless, your capital requirements are significantly higher. So it's not, and we would be foolish to think that a digital bank was similar to digital streaming entertainment versus movie theaters or digital food delivery versus restaurants. It's fundamentally different because of the capital requirements and the regulatory burden at these companies. That said, 20, 25 pounds per user is not huge and it probably won't result in ROI to the investors who back these companies. So the question is, how do you drive that revenue per customer going forward? Higher-level question, how do these businesses build in revenue lines that drive them to sustainability in the future? I think in my view, that's the immediate takeaway is that even five years on or whatever it is since these companies have launched, the revenue lines are neither rich nor diversified. And I think that's okay early on when you're in hyper customer acquisition mode. It gets extremely challenging in the macro environment that we're in today and it gets increasingly difficult to justify to investors and to the market as you mature as a business.
Lex Sokolin:
Yeah. So I think there's a couple of points that are useful to open up. This is revenue for customer people, this is not profitability per customer which is for sure, at this point, negative which gets to this question of are these banks at all or are they media companies with financial services monetization? And I love the Spotify comparison and even Spotify's 10 bucks a month so it's going to be $120 per year and Spotify works because it's not a million users, it's not 10 million users, it can be 100 million users, it can be a billion users all sitting off of the same broad music product and getting it for the same 10 bucks a month.
Will Beeson:
With no capital requirements.
Lex Sokolin:
With no capital requirements. And this is, by the way, why crypto also works, this is why Bitcoin and Ethereum-based decentralized finance works is because for the moment being outside of the formal banking system and full licensing regime merely because it's early that will come. You do have both the access to the world population, you can say, for example, that there are a hundred million addresses, versus the one million that a Starling might have, that interact with cryptocurrencies.
Lex Sokolin:
And then on the other side, you don't have that barrier entry of these gigantic capital requirements, which I think is a fundamental challenge for everyone to get over in the future. But for these neo banks, it is for sure a real problem. Now when you look at Revolut, we can talk about the small number per customer but they're still printing something like, what is it, £160 million in revenue and I think for a lot of venture investors it doesn't matter what the burn looks like, that number feels quite large and it does feel to some extent like a victory of building a large scalable business. And if you look at overall losses like the Revolut loss of £105 million, it's pretty close to the Monzo loss of £115 million but Monzo's revenue is at around £50 million relative to the £160 for Revolut.
Lex Sokolin:
So there is definitely a big performance difference that we're seeing between Monzo and Revolut, with Revolut pulling away quite significantly, £100 million in revenue difference on the same burn number. And I think that's going to be tough for Monzo which is still trying to do B2C. And you can start drawing comparisons for things like Robinhood and to things like Cash App from Square where you have these adjacent products around Bitcoin trading that both Square and Robinhood have which are real cash cows for those FinTech startups and I think potentially a cash cow for Revolut even though I don't know necessarily the specific breakout. But I do think Monzo is challenged in this comparison.
Will Beeson:
Yeah. I think it's pretty clear that if the music stopped now, arguably it did or at least it slowed down significantly starting in February of this year. But if no one raised anymore money, Revolut would definitely have the best chance of surviving. Why? Because they have, as you point out, significant revenues. They also have significant operating expenses of like £270 million, they have a massive number of employees, certainly more than 2,000 maybe close to 3,000 at this point. I think a large number of those are probably customer support employees, which is a bit of a head-scratcher because they're not known for their customer support, but nonetheless I think if one of these companies needed to drastically or rather if all these companies needed to drastically cut expenses and attempt to live off the product set and the revenues that they currently built in the customer base that they've currently built, Revolut would be in the best position to do that.
Will Beeson:
And there are two reasons for it. One, because they've managed to acquire what they report as 10 million users at the end of 2019, I think now it's close to 13 million. Again, question mark as to how many of those are active users but regardless. And secondly, because they have diversified revenue streams. So you mentioned the crypto piece, you would have a clearer sense than me as to the actual components of those revenues but it's going to be something including basically spreads for these more esoteric assets which are traditionally higher plus any sort of proprietary trading that they're doing i.e., actually owning crypto. I think they actually booked a loss and have for the past two years on crypto that they've actually owned themselves assuming a dealing capacity. But the founders come from an FX trading background. Revolut started as an FX, effectively an FX, a consumer play. And managing a FX desk for profit was a core component of Revolut from the beginning, continues to be, and surely that sort of thinking and that business model has extended to the crypto space as well.
Lex Sokolin:
Yeah. So as a comparison, Square which is without embarrassment I'll say is probably my favorite FinTech company, I have embarrassment now. I have so many favorites, there's lots of favorites. Square is certainly one of them. I think just a fantastically interesting play. Square's cash apps, so they're B2C money movement app generated almost $900 million, so nearly a billion of revenue from Bitcoin trading. This is sort of like, it's almost notional. So-
Will Beeson:
Yeah. Someone was explaining that they actually they book revenue for any time someone buys Bitcoin, they book it as revenue. And then their cost is the cost to them of then delivering that Bitcoin which doesn't really sound like the way you account for securities-
Lex Sokolin:
Yeah, I agree with you. I think it's like if you were selling clothes out of a warehouse, you might have this weird, you might be playing this game. Anyway, but they said they got about $20 million in profit out of that activity. So maybe Revolut's squeezing out $5 to $10 million, somewhere there, relatively speaking from their crypto-trading generation. And Robinhood and SoFi are other players that do this and for them it's also probably somewhere between $10 and $30 million of revenue as well in large part because the mark-up is high, the market is still inefficient in that users of these apps don't understand how they're paying for the trading. And so they don't understand that there's a spread, they don't understand that a two percent spread versus a 50 basis points spread you can get them both as easily. You can go sign up for a website and have a very small price that you pay in terms of slippage and spread and then you can use an easy experience like Square and sort of get worse economics but that's the way the cookie crumbles and the market's inefficient and so people are able to book these revenues.
Lex Sokolin:
And just for scale, another one of my favorite money-burning machines, the glorious casino which is Robinhood has, they have really killed it. You look at the Revolut, a 10 million user number, and we can do these marginal analysis and be critical but at the end of the day they have 10 million users one way or another and you really don't know the option value of monetizing that. And I think Robinhood has shown this absolutely fantastic execution on bringing out the monetization out of their users. And the way they've done it is, I don't want to use the word churn, but they've really gotten people to trade a lot. And with the lockdown and no sports and all our entertainment gone, the trading volume in the stock market for retail investors has just been totally nuts. What is the magnitude, up and up. And this has been true for Robinhood as well as E-Trade and Schwab, the discount brokers who in the past used to charge for doing the trading and who have since price-matched Robinhood at free trading and as a result just run away terrible outcomes for most retail investors.
Lex Sokolin:
Anyway, so Robinhood, in the first half of 2020 has generated almost 300 million dollars in order routing revenue. And so what that means is that they get the trade, they get the trade order, and then they send it to a market maker like a Virtoo or a Citadel or to Sigma or Morgan Stanley, so these high-frequency trading shops. And the market maker pays Robinhood for the order and now the market maker makes money lots of ways. They use the information, they provide liquidity for institutional trades so you have liquidity to absorb large trades and there's all sorts of wizardry and high jinks that goes on in institutional capital markets. But essentially, Robinhood has gotten so big that the order flow from their app is sufficient for these institutional companies to do real business on top of it and in between it. And so 300 million bucks for the first half of the year during the COVID lockdown for Robinhood to get people to trade stuff of all sorts.
Lex Sokolin:
And I think it's just really interesting because if you were to ask me, literally last year, the same time last year, I think I would've been certainly behaviorally as critical as I am now what Robinhood provides but it would've been hard for me to say that these guys are on a 600 billion dollar revenue run rate which potentially generates some ROI on that $900 million of funding that they've taken in.
Will Beeson:
So we haven't talked about it but you probably saw it, Robinhood basically announced that it would not be launching in the UK after probably a year and a half, no, two years now I'm sure of not only exploring that market but I think actively working to launch in the UK with FCA approval. They basically pulled the plug and they're not going to do it. Huge, huge news. I think the clear reason for that, in my view and I would look forward to this being confirmed by someone in the know, but the payment forward to flow model that drives the $300 million in revenue that you just talked about for Robinhood in the U.S. is not legal in Europe. Hence, no $300 million in revenue, where's the motivation to try to build out that market abroad? Why not double-down on what you're doing here in the U.S.? Now maybe there were other motivations, other reasons why Robinhood made a decision not to launch in the UK but that has to be significant.
Will Beeson:
So that leads me to ask, Revolut is easily one of the best, certainly in FinTech perhaps broadly across tech, companies at rapidly developing and deploying new products. If they are great at one thing, it's that. They're just a machine at product development. And I'm surprised that they haven't tried to make a more aggressive, a faster push, into the Robinhood type model in the U.S. So in Europe, they offer that service. I'm surprised that they haven't tried to launch something similar in the U.S. They've approached the U.S. from a banking functionality standpoint which is a slow process. They haven't really launched anything of note yet, I think they talked about having a beta but it's just not very widely distributed nor is the functionality that high but definitely the focus is on banking. I'm surprised that they didn't lead with investments, lead with trading in the U.S. where it seems like monetization could've been pretty significant.
Lex Sokolin:
Yeah. I think you, it's entirely speculation, but I think you pick your battles. The last person you want to cross is Jay-Z and the Jay-Z family office has a nice chunk of equity in Robinhood and so it's self-preservation.
Will Beeson:
I'm sure there are other rappers that could invest. Snoop is in what, Acorns?
Lex Sokolin:
There's only one king. No, I'm kidding. I just think you want to attack where things are weak. I don't think people should ... I think it's hard to enter the UK to fight the neo banks and I think it's hard to enter the U.S. to fight the robo advisors and investment apps and digital lenders. Notably, the exception is Goldman Sachs. Goldman Sachs launched Marcus in the UK and within a snap of a finger got up to £25 billion of deposits which was the regulatory limit for the type of license that they got. So that was really interesting for me, how did Goldman 10x the size of all these consumer apps? And maybe the answer is they just took a bunch of private wealth money and moved it over into Marcus, but that's-
Will Beeson:
Well, one part of the answer is the UK is a heavy cash savings market, what they call fixed-term savings accounts which are like CDs in the U.S., that's a huge, huge market in the UK and it's not one that is targeted by Starling, Monzo, and Revolut to any significant extent. So they came in, they offered a very high interest rate and they were able to attract a lot of deposits that way.
Lex Sokolin:
Yeah. I guess this is where an international footprint can really help because you can arbitrage these interest rates.
Will Beeson:
So I want to make sure we clarify a few points just because they're so important. But just highest level, the main revenue drivers for all three of these UK digital banks, Monzo, Starling, and Revolut. It's card interchange and in, I guess, probably all of those cases also perhaps some income related to FX on foreign transactions. So interchange is tightly capped in Europe meaning domestic card spend, so if these are UK customers at these UK banks spending money in the UK, the interchange is tightly capped. I think it's something like 20 basis points and it's the same across Europe.
Will Beeson:
The benefit to all these companies is when their users take their cards abroad, i.e. outside of Europe, and spend. So in the U.S. where interchange is less tightly capped and depends on what sort of bank you are you can capture a much higher interchange share. Hence, Revolut with an FX background thought of as a travel card early on has a strong play from that standpoint. But regardless, those three banks have traditionally viewed that card interchange and associated baked in fees as the main revenue line. Revolut has diversified across a wide range of other consumer products including selling insurance and investments and cryptos we've talked about, they also offer a paid account i.e. subscription revenue for higher functionality or a metal card depending on whether that's relevant for you. And Monzo has not successfully launched any sort of subscription account.
Will Beeson:
Stepping back, Starling has diversified into the business space where it's easier to charge for an account fee, to charge an account fee, because businesses are used to paying that. Starling has a couple of different paid account offerings. One is for either retail or business customers, you can pay a monthly fee and also get a Euro account in addition to your Starling account. And then for businesses, they also have ... Actually, they recently launched USD accounts that wouldn't have been reflected in the 2019 financials but recently launched USD accounts which similarly have a monthly subscription fee if you're a business. And they have some higher functionality for business type use so accounting system integration which also carries a subscription fee. So they're definitely pursuing the subscription fee approach. They've built what's now a pretty sizable business in the SME space. They report three percent market share in the UK and SMB businesses there. They won one of the larger grants of this RBS remedies program dating back maybe two years ago now and they're implementing that.
Will Beeson:
And they're definitely on track to build a significant customer base there and it's one that they can probably monetize more easily than they can retail customers. The last point, which I think is relevant, and it's one that really jumped out at me especially Starling but also Monzo have talked about this marketplace type model, one where they're helping you facilitate switching of your energy provider or your cable provider to save money, maybe they offer financial products from third parties and part of the journey is built in to the Monzo or the Starling app. Some of them are totally closed loop within the Monzo or Starling app, you can actually complete the entire journey with a third party in the app. And I hope, I hope, someone reaches out and corrects me on this that I've somehow misread Starling's report. From what I can tell, they generated £72,000 in revenue from the marketplace. The marketplace that's been a core part of their strategy for years generates £72,000 of revenue? That to me is mind boggling.
Will Beeson:
And on one level I hope that there's something I'm missing or that there's important new growth strategy going forward to change those economics. It looks like for Monzo, it's not significantly different. Maybe the difference there is they have this savings account product that they do in partnership with OakNorth inside the Monzo app and Monzo takes a share of the interest income that's generated on those deposits. So perhaps that's a higher value marketplace partnership, but regardless, any talk about marketplace does not seem to be proving out in the numbers with respect to any sort of interesting or sustainable long-term business.
Lex Sokolin:
Yeah. I think to close out this topic, and I remember when we were talking with the CEO of Tinkoff Bank, his aside was very much that marketplaces don't really work as the core driver of a bank and really just get over it, swallow it, and do some good old balance sheet lending which is a persuasive argument. But I think the North Star for the marketplaces is ANT Financial and maybe TenCent's Wepay, part of WeChat. And those are eastern super apps where financial services is at the core, it's the chassis on which all of these other apps like Uber and Amazon and Netflix and Spotify, all the eastern version of these apps they all sit as modules inside of this super app which has lots and lots of "marketplace functionality" and then is the money provider and the identity provider and the authenticator into all of those.
Lex Sokolin:
And so the operating system of the mobile phone in that environment is weak, so a weak iOS, and then the financial application which has your wallet and your money and your payments and your authentication and your point of sale stuff and financial Alipay is very strong and is at the core of all the commerce that you do. And so I think in the west, there's two problems. Number one is the market is literally 1,000 times smaller in terms of this digital mobile behavior for FinTech commerce. And then second is a misunderstanding at what makes the other apps special. And it is not a bank where there is a tab for third-party lead generation because in that case you only have as many users as the bank has which is not that many because people don't necessarily convert in to banks in large amount. And then out of that, there's only a small percentage that are ever going to go into your affiliate program and floats around the same way that how many people really deal with their card rewards in a meaningful way hands-on.
Lex Sokolin:
The game is flipped in the eastern FinTech companies where you have to get all of the core high-tech super sexy apps to be almost subservient to you and integrated into you and be the primary way for how somebody would interact with your service. So for example, if you couldn't order an Uber unless you used the Starling app, I think the economics would be quite different.
Will Beeson:
Fascinating point. Real quick to round out, because there's an important piece we haven't picked up on yet and perhaps the course of this conversation has been reflective of the digital banking mindset in general. Lending, that last little afterthought once we've talked about all the cool stuff. All of these players, Monzo, Revolut, and Starling have some level of lending activity. It's generally very small and it's generally overdraft based with the exception of Starling who does some business lending and also, I think this is mostly post their 2019 annual results, participate in effectively the UK equivalent of the PPP government lending to small businesses to help blunt the impact of COVID. And they did a tremendous amount of lending through that. But regardless, as of the close of their 2019 financial year, lending was a very small part of any of these company's businesses. The only piece I think worth, or rather the most interesting piece worth noting I think here is that Monzo had something like 144 million pounds worth of lending.
Will Beeson:
And for context, their deposit base at the end of the year was about £1.4 billion, so something like 10% of their deposit base they had in loan assets on which they took a 20 million pound expected loss reserve basically. So effectively what they're saying is, whatever it ends up being, 15% of their lending they're expecting to lose. Now how much of that is precautionary and a worst case projection versus genuine expected losses from an accounting standpoint? There's not that much difference. But it does raise the crucial question of one, how much lending are you doing? How much lending do you want to do? And do you actually have the right, this is model place to be successful in lending? Lex, you've talked about OnDeck a few different times over the past weeks and months, the small business online lender that IPO'd at something like a billion or something and then most recently was acquired for $90 million in cash.
Lex Sokolin:
$90 million of which I think nearly 90% is in stock.
Will Beeson:
Yeah. That's right, yeah.
Lex Sokolin:
So quite a eulogy.
Will Beeson:
Right. Lending is not an easy business. Potentially very profitable, not easy. I think we probably need to wrap up there. I do want to say actually ... So we've covered a lot and this is a really important and sensitive and nuanced and multifaceted topic, there are people out there who will have great insight and strong views about these companies and the results and our views expressed in the conversation. Please share them with us. We will push back out some of the most interesting commentary assuming it comes in to just share some of the listener and reader views and thoughts, because again, this is such an interesting topic.
Lex Sokolin:
Absolutely. Like a good American, I think we should end with leverage.
Will Beeson:
Lex Sokolin, thank you very much for joining us today.
Lex Sokolin:
Thanks so much, Will.
