When the UK set up a new body in 2013 to oversee bank regulation, policymakers gave it a goal to promote competition alongside its principal mission of ensuring safety and soundness. Supervisors embraced the mandate by allowing the formation of many more banks. They launched a New Bank Start-up Unit in conjunction with their sister agency, the Financial Conduct Authority, to help usher firms through the process and, over a ten year period, awarded licenses to 37 new banks. 

For the most part, the new banks were small. Many didn’t even survive – nine are no longer authorized. Monzo has since grown to £13 billion of assets and a staff of over 3,000, but when it became a bank in 2017, it had assets of £20 million and a workforce of 65. Authorized in May of this year, newly designated SilverRock Bank has a workforce of just six.

Five years into its life, Sam Woods, CEO of the new body known as the Prudential Regulation Authority (PRA), reflected on its challenges. He highlighted the tension that exists between its two objectives. Managing safety and soundness while also encouraging competition “is doable but it is tricky,” he said. Approving smaller banks might mitigate some of that tension, but it doesn’t eliminate it, since small banks are no less likely to get into trouble than larger banks, particularly when they are fast-growing, concentrated in higher-risk niches and untested in a downturn. The struggles of Metro Bank prove the point.

Woods also observed that despite his best efforts as gatekeeper to the market, no small bank had successfully become a large bank. He surmised that the behavioral stickiness of current accounts may be a greater advantage to incumbents than regulation – a feature another UK agency has sought to address with limited success. Still, developments in the insurance market show what is possible: Some of the UK’s largest general insurance firms started as small challengers less than 30 years ago. 

This week, the Prudential Regulation Authority approved its biggest bank yet. Revolut had been seeking a license for three years but its size and complexity made progress slow. On Wednesday, it finally got its wish. With 9 million customers already in the UK and 45 million worldwide, it will be the largest new bank to enter the UK market on the PRA’s watch.

Cautiously, the PRA has attached restrictions. Revolut will initially enter a “mobilization” stage of up to a year in which it is supposed to complete the remaining build-out of its bank. It’s unusual that an entity of Revolut’s existing size should go through such a phase. Mobilization is principally designed to enable new banks to secure further investment, recruit staff, invest in IT systems and commit to third-party suppliers ahead of a complete transition. Revolut already has £1.6 billion of capital, 331 employees in risk and compliance functions and has spent £95 million on IT and communications over the past three years. Yet the stopgap allows the company and its regulator time to operationalise the transition plan and hammer out details. 

For Revolut, a banking license is a boon. As an “e-money” institution, it has always been permitted to take in customer funds but it could never invest them. Customer funds need to be safeguarded in ring-fenced accounts, limiting the returns it could extract from its balance sheet. As a bank, Revolut has more options. It gains access to the Bank of England, where it can park deposits overnight at the policy rate (currently 5.25%), it can make loans (at even higher rates) and it can invest in securities (somewhere in between). It also gains access to the Financial Services Compensation Scheme which provides deposit protection of up to £85,000 per customer together with the seal of trust it confers. The issues we discussed a few weeks ago currently facing certain fintechs in the US illustrate the risks of parading as a bank without quite being one. 

With license in hand, Revolut is reportedly in the process of securing a $45 billion valuation via a secondary share offering. This would make it more valuable than both NatWest Group and Barclays, whose origins predate Revolut by centuries. Does the new license underpin such a valuation? Let’s dig into its balance sheet to see...