Revolut’s Wall of Worries

Red Flags over Latest Financial Accounts Raise Questions?

The Financial Times is reporting major issues with Revolut’s FY22 accounts, the latest in long line of issues facing Revolut.

The fourth wave of start-ups banks is looking shaky – going back to Egg in 1990s start-up banks persist in their attempts to disrupt (mostly) retail banking. ?

NEO BANK MODEL LOOKS SHAKY

Over 400 Neo/Challenger Banks globally currently operate, only 13 are profitable.

The current ‘digital model’ is obsessed with customer numbers, living off card interchange revenue from cards especially prepaid, crypto trading, very small revenue per customer and very little actual lending or deposits.

Start-up funding has dried up and both stock markets and private VC markets don’t value a model with high burns cash and no quick path to probability.

“…CB Insights found that funding for neo banks clocked in at $1.9 billion in the second quarter, a 77% decline”

REVOLUT EXCESSES

Revolut excesses are clear to see, no profits, high cash burn and low customer spend

Revenues per customer are pathetic at ￡14.80 per customer, a corner store does better and makes profits.

Revenue is heavily UK market focused with 88% of revenue in 2021 accounts.

Major revenue is still heavily dependent on card interchange built on travel - will this ever come back to pre-Covid levels?

Revolut has no banking licences in develop markets – it only has a Lithuanian licence!

Revolut decided to continue to expand aggressively during Covid-19 which has dramatically increased cash burn.

Revolut rushed into totally unregulated Crypto space which is not consistent nor is it safe for consumers yet.

REVOLUT MAKES NO PROFIT

A key requirement of any licensed bank or non-banks is making money, profits are essential to allow for balance sheet growth and off set credit losses, as well as future investment.

?Revolut disturbing lack of profit and increasing losses is a real worry. ?

CUSTOMER GROWTH SLOWS

Revolut claims 20 million global customers based in one transaction in 12 months – the real number is probably 20% of this.

WIRED reported “As coronavirus hit global travel, one of the key sectors that Revolut relies on – daily active people using the app – fell from 1.3 million on February 1 to 0.9 million on March”

This chart shows growth rates over time, the key issue now is growth will be much tougher to gain as inflation, interest rates and the high price or lack of investment funding take its toll.

?REVENUE IS MISSING

Revenues per customer are pathetically low at ￡14.80

This Flagship chart shows how dismal all Neo bank revenue is and these are not new businesses so nothing will change going forward

88% of Revolut 2021 revenue is from UK market

Major revenue is still heavily dependent on prepaid card interchange built on travel, which is not inflation proof.

Crypto trading is now a very heavy focus?

VALUATION IS RUBBISH

The idea that Revolut is worth US$33 billion is total rubbish, its closer to US$3-4 billion based on revenue and P&L.

Brazil’s NuBank is three times bigger than Revolut, its pre IPO valuation was US$45 billion

NuBank’s 2022 market cap was as low as $14 billion ($22 billion today) despite Warren Buffet owning shares. Dave and MoneyLion similar stocks are both well down.

Revolut doesn’t want to reduce its valuation because if the knock-on impact across the business, a collapse in its ESPO shares would have significant impacts.

SALARY SACRIFICE SCHEME ?

Since 2020 Revolut has aggressively used salary sacrifice scheme (SSS)

“The company says these plans included a reduction in outsourcing costs and an “entirely voluntary” SSS, where any employee could exchange part of their wages for twice their value in Revolut share options.” WIRED ARTICLE

“The shares were valued at $121.4015 per share - the value of Revolut’s last fundraising round in 2020”

. “So far, almost 20 per cent of our employees globally have submitted their sacrifices. In Support we’ve gathered only 44 submissions out of 495 employees”

“Our goal is to use SSS as an alternative to the need of employees redundancy and other cost cuts”

You can see why Revolut doesn’t want its valuation to decline or accept cuts to its internal share scheme. Let alone the accounting and regulatory issues.

“Last year it was revealed?that the company was asking applicants for business development and PR roles to recruit customers for free in order to have a chance at getting a job” WIRED ARTICLE

KEY RISK STAFF DEPART

Never a good sign when key risk staff depart.

Five key?executives resigned including UK chief risk officer,?Victoria Stubbs?UK Head of Regulatory Compliance,?Justine Wootton?and UK Money Laundering Reporting Officer – see links below in comments.

STAFF DEPARTURES

“As in many companies, COVID-19 necessitated cost-cutting across our business and, in the last resort, we made 62 redundancies globally, representing less than 3% of our staff,” a Revolut spokesperson said on June 5th.

A further 50 staff were ‘pressured’ to leave European businesses according to reports in WIRED and other media sources. These departures appear at odds with EU redundancy regulations.

NO PUBLIC ACCOUNTS

No public accounts have been lodged since July 2021 last year – the lack of accounts is deafening.

The 2021 accounts showed a total dependence on the UK market – 88% of all revenue and card interchange dominates. The move in crypto while increased revenue has many unanswered questions.

The 2022 accounts were due in June 2022, and must be filed by Sept 30th.

AUDIT ISSUES

Audit issues are often dry with the devil in the detail.

The FT report below however raises some very serious red flags around Revolut accounts and practices, this quote says it all.

‘UK regulators highlighted significant flaws in the auditing of its accounts, including an “unacceptably high” risk of “material misstatement”.’ ?

More reminiscent of Wirecard than a high street retail bank….time will tell!!

Revolut under pressure after UK regulators find audit flaws

Financial Reporting Council said failures created ‘unacceptably high’ risk of misstatement for $33bn fintech

FINANCIAL TIMES Laura Noonan, Michael O’Dwyer and Siddharth Venkataramakrishnan in London

Revolut is under pressure from its auditors to improve internal controls after UK regulators highlighted significant flaws in the auditing of its accounts, including an “unacceptably high” risk of “material misstatement”.

The rapidly growing payments group, which has suffered a string of high-profile defections in its risk and compliance teams in recent months, is the unnamed “financial services provider” whose audit by BDO was criticised by the Financial Reporting Council in its latest audit quality inspections, people familiar with the matter told the Financial Times.

BDO’s audit of the unnamed company suffered from an “inadequate” approach to revenue recognition and “as a result, the risk of an undetected material misstatement was unacceptably high”, the FRC said in its annual report on the quality of the accounting firm’s work, published in July.

The watchdog also highlighted deficiencies in how Revolut’s payment processes were tested by BDO, the UK’s fifth-largest audit firm by revenue, which it said could have led to “material misstatements”.

“The auditors are being significantly more challenging now, because they’re getting beaten up by their regulators,” one of the people familiar with the situation told the Financial Times, adding that BDO’s more rigorous approach could lead to delays in filing accounts for key Revolut subsidiaries.

Revolut Group Holdings Ltd, the group’s parent company, and Revolut Ltd must file 2021 accounts by the end of September. Accounts have been overdue since June 10 for Revolut NewCo UK, the entity intended to house the UK banking licence applied for by Revolut in January 2021, but which it still has not received. Other UK subsidiaries including Revolut FIC Ltd, which handles digital assets, and Revolut Travel Ltd, are also due to file at the end of September.

While delays in filing accounts are rarely punished, they can lead to the prosecution of company directors, which include Revolut chief executive Nikolay Storonsky, and civil penalties against the company itself under UK law.

Revolut must improve “unsexy things like its back office and controls” because it “needs to have a back office like a bank and it’s got the culture of a tech firm”, said a second person familiar with the situation.

The FRC had concluded that the fintech group “needs to have the control environment of a bank”, said this person, adding that Revolut was “definitely trying to do all the right things” and that management understood they needed to invest in processes and controls.

A company’s internal controls include the systems and processes that ensure its financial reporting is reliable and that it complies with its legal and regulatory obligations.

Revolut is Europe’s second most valuable private fintech, securing a price tag of $33bn in an $800mn funding round led by SoftBank and Tiger Global last year. It recorded a net loss of ￡168mn in its most recent annual results, for 2020.

It suffered an exodus of senior staff in recent months, including its UK money laundering reporting officer, UK chief risk officer, UK data protection officer and both UK and global heads of regulatory compliance.

Revolut is still awaiting its banking licence in the UK. Revolut is also the last company that applied that is still awaiting permanent approval by the FCA to offer cryptocurrency services in the UK. The FCA, which is looking solely at whether crypto groups have adequate anti-money laundering processes, in March announced that a “small number” of companies could remain on a temporary register for crypto firms until their applications had been fully processed.

BDO, which was paid ￡650,000 for checking Revolut’s 2020 financial statements, was criticised by the FRC in July for the “unacceptable” quality of its audits. Just seven of its 12 company audits reviewed in the FRC’s most recent annual inspections were deemed up to scratch.

Auditors are under increasing pressure from the regulator to resist companies’ demands to sign off accounts on time if management has not provided the necessary information. The shares of UK-listed groups such as S4 Capital and Revolution Beauty have been suspended this year because of delays in publishing their annual results. Revolut declined to comment.

BDO said it could not comment on individual companies it worked for. The FRC declined to comment.