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Neobanks: fast, convenient, reliable – choose two out of three

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Revolut needs the licence to help it expand in the UK, the US, Australia anywhere. Without it, the payments group cannot lend or benefit from the UK’s deposit insurance scheme. So Revolut is separately rushing to reach an agreement with top shareholder SoftBank, to break the deadlock. Collage Leonid Lukashenko
Revolut needs the licence to help it expand in the UK, the US, Australia anywhere. Without it, the payments group cannot lend or benefit from the UK’s deposit insurance scheme. So Revolut is separately rushing to reach an agreement with top shareholder SoftBank, to break the deadlock. Collage Leonid Lukashenko

Neobanks are pleasant and comfortable. But for some reason, the regulatory authorities that protect the safety of our money are wary of them. What pitfalls do we not suspect when we follow the fashion for neobanks? 

The Santa Barbara series pales before the history of the Revolut neobank, one of the largest in the world and the most expensive bank in Britain. Or rather, before the story about how it tried to get a banking license. Europe's largest fintech company has been waiting for two years for approval of its application from the Financial Supervision Authority (FCA) and the Prudential Regulation Authority (PRA), which oversee financial companies and banks in the UK.

Why did we mention Revolut from the very beginning? In the last week of May, the leadership of Revolut should meet with representatives of the government at its invitation. It is officially stated that the conversation will be about the government's program for the development of the British economy as part of a series of consultations with business representatives. But there will certainly be a question from Revolut about why it can't receive its banking license.

Without a license in Britain and not only there? Yes! 28 million customers in 37 countries – also yes! Although in Lithuania, the USA, Australia, Japan and Azerbaijan, Revolut ­still has a banking license. And everywhere the company offers its customers approximately the same services: from money transfers and instantly issued payment cards to cryptocurrency transactions and investments in precious metals.

But in its home British market, where it has the most customers - 6 million, Revolut is still not quite a bank.

It got to the point that in March 2023, the Head of Revolut's banking division in Britain, James Redford, who was just dealing with the issue of obtaining a license, resigned.

Two months later, Revolut's Financial Director Mikko Salovaara left his position, who shortly before leaving said that the license would be issued "... from day to day."

Alas, it didn't work out.

Read my lips: convenient, popular, fashionable, but without the approval of the supervisory authorities. It reminds me of riding a motorcycle: fast, breathtaking, but at the next turn you can fly into a ditch.

They breathe in the back and push with their elbows

It would seem, why would a neobank need a full-fledged banking license? It's doing well right now: profit, a huge number of customers. But thanks to the banking license, Revolut will be able to play on an equal footing with traditional banks. That is, it will be able to lend to customers and attract deposits. Moreover, these deposits will be protected in Britain by the state deposit insurance program Financial Services Compensation Scheme. And this means more trust in the neobank and even more customers and profits. That's even more of our money at its disposal.

So, white-haired bankers in strict business suits should strain. Sneaky IT guys in ripped jeans and colorful sneakers are close behind.

But why be surprised? The world goes into numbers. And money, too.

What does banking supervision lack?

The COVID-19 pandemic helped neobanks a lot. While the whole world was in quarantine, and bank customers were afraid to stick their noses out of the house, new fintech companies were building up their muscles and gathering new fans. Because from the very beginning they put on remote services.

According to Neobanks.app, there are now 272 neobanks worldwide. 97 of them are registered in Europe. They grow up fast, but they are treated like royal bastards: they turn a blind eye to their small pranks, but they are beaten hard for major transgressions.

Supervision lacks strict compliance with the rules from neobanks, which for traditional banks are getting tougher every year. But it is the avoidance of rigid frameworks that helps neobanks to be flexible, comfortable and fast.

Therefore, not all neobanks are eager to get banking licenses. Some choose partnerships with already operating banks. For example, like the Vietnamese Timo, which has Viet Capital Bank behind its back. Or the Ukrainian monobank, which has a Universal Bank behind its back, owned by the former Head of the National Bank of Ukraine (the Ukrainian central bank). In such duets, neobank undertakes to create a comfortable service, and the traditional bank acts as a guarantor of financial transactions.

Some fintech companies dream of buying their own bank in order to get a license. This strategy was chosen by Moven in the USA. But it has not yet managed to implement its plan, although it has been trying to buy the bank for six years.

There are neobanks that persistently try to reach out to banking regulators to obtain banking status themselves: British Revolut, Korean Kakao Bank or Chinese WeBank. However, in China, the Communist Party stands behind all banks in one way or another. And if the CPC decides that WeBank should have a license, it will receive it the next day.

And yet some succeed.

London-based startup Griffin received a banking license in March 2023 after just 12 months of efforts. Not everyone is so lucky. Starling neobank has been trying to get a banking license in Ireland for 4 years, but withdrew its application in the summer of 2022.

What prevents Revolut? It looks very much like the skeletons in the closets are interfering with it. The audit company BDO, which evaluated the work of Revolut, said in its report that some of the bank's indicators may be "seriously distorted." In Lithuania, Revolut has already run into a fine. Revolut got a fine of 200 thousand euros for unauthorized collection of customer data.

To dive or not to dive?

While neobank does not have a full-fledged banking license, there is also no strict supervision by the regulatory body. In this case, not only the neobank itself, but also its customers are not too interesting to the regulatory body. Compare this with how clients' money was saved from SVB, Signature Bank and Silvergate Bank (all from the USA) or Credit Suisse Bank (Switzerland).

For example, the American startup Beam, which offered a mobile application for savings at a rate of 7% per annum in US dollars, lived for less than two years. The Federal Trade Commission (FTC) shut down this project for fraud. Its clients never even saw the deposits, let alone the interest.

German neobank Ruuky worked for three years and declared bankruptcy on January 9, 2023. Although Ruuky was the largest neobank in Europe that focused on social media activity.

It looks like choosing a neobank is like bungee jumping. It is cool, breathtaking, but very risky.




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