Revolut is a phenomenon. There is no doubt about it. The fast growing unicorn in the fintech space took the world by storm… well maybe not the world, but at least Europe. They have over 3M users, billions in transactions every month and a staggering 1.7 Billion USD valuation to date.
For those who do not know, Revolut is a “digital bank” that offers multi-currency debit cards and an amazing banking app (no joke, try it out). They are going to revolutionise banking by lowering the fees for consumers and offering better banking services. Take the market with a better product all while sticking it to the big bad banks… Woohoo!
I mean… they are going to do that… right? They say this is what they are doing. They are branding themselves like that. They even bought a banking license!
Well, I’m a bit suspicious. It does not look like a good strategy, and I think the guys at Revolut are really really smart. I believe the long term game is to go after Visa and Mastercard. The payment systems. And let me tell you why.
1. Most revenue from banking is made from loans and loans require a ton of capital
Banks make the most money from giving out loans and to give out loans you need:
- a ton of capital (way way more than Revolut has from the VC money)
- a great skillset in risk management
- local know how and connections to rub shoulders with those national banks and politicians.
Giving loans is still a local business. You have to align yourself to national standards, local culture and you are pushing yourself into the arms of regulators. You need to have that amazing liquidity. Revolut started international in nature, fast expansion is the word. Why would they give up their competitive advantage?
But you know what you don’t need a ton of capital for and just a large network of consumers and businesses?
Electronic funds transfers over a large geographical area.
You know who does that?
Visa and Mastercard.
2. Banking is about big business players
Most of the revenue for WiseUp, 75% to be more precise, comes from abroad. And all the tools that we pay for are from abroad and paid in non-national currency (we are based in Romania). And this is a common behaviour. The market is global and more and more businesses start international. This is why Stripe Atlas is killing it.
So I switched us to Revolut when I found out I was paying over 300 EUR only from the foreign exchange difference. And Revolut are targeting us with more and more time saving services. It will be really hard to change a supplier that is deeply integrated in your business processes: salaries, accounting, payments, cards, etc.
And you know where big companies come from?
From small companies.
But small companies have no negotiation power with respect to payments, exchange rates taking the worst deals on the market.
3. Single Euro Payments Area (SEPA)
Yup, the international payment regulation across the European Union. A single set of rules which governs so many countries.
Who does this help? Consumers. Anyone who travels or does some sort of international business.
Who does this hurt?
You guessed it! Visa and Mastercard.
Do you, as a consumer interact with Visa and Mastercard products? Do you have any personal attachment to them? When did you feel they did anything for you?
You just need them… until you don’t anymore.
4. The payment system is a mess
With my team as WiseUp (shameless plug) in the last 18 months we have been developing two products heavily dependent on e-payment and I have to tell you: the payment system is a mess.
There is little to no protection for the merchant, there are hefty fees on almost everything. And security? Security is almost non existent. Fraud is common. Stealing of funds and copying cards is insanely easy.
The reason you do not hear about it as consumers is because most of the risk is moved towards the merchant and the banks. And you have to trust the system to use it, so the system must seem secure. All these costs and fees are just accepted as the way of the land by the merchants and the banks.
It is so painful that we have recently signed up a 1k/month contract with another company hoping their product can help us solve the fraud problem. The pain is so big we agreed to paying 1k per month for hopes!
We have no alternative. We all dance as Visa and Mastercard want.
Visa and Mastercard are platforms – big, powerful platforms. But also old platforms… platforms that have not innovated in a long, long time and who rely on their reach as an advantage: international and multi currency.
What company do you know that targets large geographies with multi currency services as a competitive advantage? Yup! Revolut.
Does is start to smell like disruption to you?
Playing the long game
If you were Revolut, would you compete with all the banks in Europe, with less funds, less risk management know how and in the most heavy regulated and localised industry?
Or would you take advantage of globalisation, the change in consumer behaviour regarding international payments and solve the costly pain of e-payments, and lack of alternatives to the only two players in the market?
Banks don’t love Visa and Mastercard more than merchants do. That is why I think Revolut will become the American Express (AMEX) of Europe. Btw, AMEX makes more money in US than VISA and Mastercard make world wide.
What I think is:
- they will partner up with banks and other financial institutions for giving out loans and other similar services — pension funds, insurance, etc.
- they will use their much much better targeting and profiling to allow their users to be targeted with other products and services
- they will launch their digital POS tools for businesses. They already started integrations with several services.
Do you agree? I would love to hear your thoughts and arguments in the comments.
If you’re interested in building fintech products, check us out! WiseUp is a product design agency which helps customers build and launch cutting-edge products faster with our innovation-driven development process.