Revolut’s Rise As UK’s Fintech King — What’s In It For India?
Do you know which sector in India clinched the most number of funding deals last year?
Fintech and financial services — 123 deals.
In your face, global economic slowdown!
The fintech industry is rising and expanding faster than the pace of the Virgin Galactic team which scrambled their jets (literally!) to send Richard Branson to space faster than Jeff Bezos. Just yesterday, Revolut, a new-age fintech startup focused on banking services, became the UK’s most valuable startup with a $33bn valuation (more than Paytm’s expected valuation). It raised $800m in Series E funding led by SoftBank and Tiger Global (6x valuation increase in a year).
Today, we look into the business model and operation of Revolut, its potential interest in an India expansion and the possibility of more UK neobanks flocking to Indian shores in what is anyway rapidly turning into a fairly crowded market
Fintech Familiarisation
Before we offend the sensibilities of our meticulous readers, we should clarify that fintechs and neobanks are separate but occasionally overlapping entities.
The word fintech essentially includes any business that is a cross between technology and finance. Neobanks, on the other hand, are “banks” which operate online, also called digital banks that exist without branches. So, yes, neobanks are a subcategory within the fintech industry.
Revolut is a seven-year-old company that started out as an app offering prepaid debit cards and a medium for people to transfer and exchange money (hence fintech). Today, it has diversified immensely into many cross-cutting service domains — multi-currency banking, payments, international money transfers, stock and cryptocurrency trading, budgeting tools etc. The company has more than 15 million worldwide customers and is expected to hit nearly 5 million bank account holders by 2025.
Zero fees on foreign transactions was the best-selling proposition of Revolut in its early days. Even though the free services have transitioned into fee-based services now, the gateway model of business has helped the company draw young customers into slowly expanding their use of the app.
Another distinguishing feature of Revolut is its “rapid deployment of new products”. The reason it has pulled ahead of rivals is because of the faster pace of innovation and expansion of services that has catapulted its presence in more than 30 countries in just seven years. It also offers a very niche automation feature — a digital wealth manager — for users with large portfolios which makes investment decisions on the user’s behalf, a fairly novel offering.
At present, Revolut has at least 10 new projects in their development stages, waiting to launch in the next three years. In addition, one of the greatest ambitions of Nikolay Storonsky, the Founder and CEO of Revolut, is to create a “superapp” which will provide a single-point access to ALL customer financial services in the future.
Conceptually, the idea of a one-stop-shop i.e. “superapp” is not new. WeChat, Paytm and others have long flirted (and executed to a fair extent) with the idea, albeit with different approaches and varying growth trajectories. Several mainstream banks are continuously and quickly sprucing up their apps to pack them with as many transactional features as possible with the same superapp narrative.
And then there are tech platforms such as Google Pay who are increasingly offering a diversified portfolio of services. The idea is to retain the user within the app for as many transactions as possible.
Amidst all the innovation, it will perhaps be the oldest form of banking i.e. underwriting loans that will still create the biggest moat! In that context, it is worthwhile to note that Revolut has banking licenses in the European Union and is in the process of attaining one in the UK as well.
The Fintech Finesse
Revolut may have risen to the top of the UK fintech valuation pile but it is part of an industry which single-handedly attracted $5.7bn of investment into the country in the first half of 2021.
It is second only to the US in terms of funding but with players like Revolut, N26, Rapyd, SaltPay, Checkout.com etc. Leading the coterie, the tech-heaviness in UK markets is on an upward boom as well (Revolut is worth over 25% of the companies in London’s FTSE 100 Index).
Cut to India, the most sought-after emerging market for fintech players. It has been raining unicorns in the startup sector lately, including in the fintech space. Cred, Digit Insurance and Groww became the latest entrants in the $100bn club recently.
Even though the UK fintech markets are expansive, there is only a finite pool of talent as well as target customers that the markets can depend on before running out. Take Revolut, for instance. Almost 88.4% of the company’s (non-adjusted) revenue comes from the UK markets. But as its domestic market gets crowded with more players, Revolut’s chances of making durable profits turn more limited.
Enter, India — one of the world’s biggest technology markers with a $100bn fintech opportunity!
The British Invasion 2.0
Efforts have been underway since 2018 when the UK started sending high-level delegations to India to help expand their domestic fintech companies’ digital consumer bases.
Winvesta, a London-based wealth-tech startup, beat its rivals to the punch when it set up shop in India in March 2020. It has recently started offering multi-currency accounts to Indians, similar to the ones offered by Revolut and Transferwise in the UK.
Last month, Tide became the latest UK-based fintech firm to step into India with a £100m ($137m) investment and 1,000+ job creation plan over the next five years. It has also partnered with RBL Bank, one of India’s fastest-growing private sector banks, to facilitate current and open account services for SMEs.
Revolut has been eyeing the Indian markets for a while now and plans to start off with a $25m investment upfront with the possibility of a local acquisition imminent as well.
Revolut’s demand in India will be driven by its flagship “no-cost instant worldwide money transfer to and from the country. It seems that focusing on remittances is at the core of its India business. This could also bolster the rise of open banking in India, a business that involves API-enabled sharing of bank data and is becoming popular in the West (despite significant concerns surrounding its data privacy issues).
The UK authorities have also intervened for greater fintech cooperation between the two countries at a policy level. The Lord Mayor of London travelled back in 2019 with the sole objective of convincing local regulators and companies to allow UK-based fintech startups to be incubated in India
India-UK Fintegration
Speaking of regulations, this is where the concerns begin. Unlike in the UK where the Financial Conduct Authority (FCA) maintains a close watch over all businesses, India is yet to climb out of the gray regulatory landscape that NBFCs (including fintechs) operate in. On top of it, digital banking operations involving cross-border and forex transactions could be misused for money laundering to a great extent.
The RBI recently show-caused WazirX (an Indian company) to explain how it safeguards its crypto wallets from criminal misuses. So, crypto-enabled accounts of foreign fintechs like Revolut are expected to stand test on a higher pedestal of scrutiny. (FYI: Revolut has been accused of non-compliance issues in the past). Perhaps, the regulatory sandbox approach suggested by the Lord Mayor could prove beneficial in this aspect.
The UK is one of India’s largest sources of FDI. Both the countries have also remained close trading partners and the closeness has taken lift particularly post Brexit with the UK pursuing more non-EU trade relationships. In light of the rising crackdown on tech firms in China, India is expected to turn more favourable for foreign investment into its highly-buoyant startup industry.
This does present an excellent opportunity for UK-based fintech firms to migrate. But with domestic players like Paytm, MobiKwik and others expanding their businesses aggressively, the industry is certain to witness some simmering competition.
(Originally published July 22nd 2021 in transfin.in)
