By Daniel Lanyon on Tuesday 24 November 2020
At the recent AltFi Festival of Finance’s Leadership Day, we caught up with City veteran and founder of Aberdeen Asset Management Martin Gilbert for his first interview since taking on the role of Revolut chairman.
Growth has been the key tenet for disruptive start-ups in banking over the past five years. Growth at any cost. No European fintech epitomises this mantra more than Revolut which claims a global reach of 13 million customers, all acquired since 2015.
For its first chairman, Martin Gilbert, however, the secret to long term business success contrasts starkly: “survival”.
Gilbert, who joined Revolut (officially) as its first chairman at the end of 2019 as the seeds of the global pandemic were sown, knows a thing or two about survival. For 37 years he was the CEO of Aberdeen Asset Management, the company he founded back in 1983, the year before Revolut’s Nik Storonsky was born. He stepped back from the business last year following its merger with Standard Life that created one of the largest asset managers in Europe.
“I've just survived by the skin of my teeth on a few occasions....survival is the key of businesses,” Gilbert told at AltFi at the (digital) Festival of Finance 2020.
“I've had my share of making mistakes like everyone else has. I'm sure Revolut will make mistakes. But it's how you deal with the tough times that's how you can judge yourself as a CEO. It's dead easy to be a CEO in good times. My job is to make sure I'm supportive of Nikolai when he does have the inevitable difficult times and when things are going well say to this is a time to be cautious.”
Gilbert adds that it is always important to look at the potential downside as well.
“I'm guilty, like probably all CEOs and founders of fintech businesses of looking at the upside too much. You've got to look at what can go wrong,” he added.
A global pandemic
The shutdown of worldwide travel, large swathes of the economy and profound uncertainty as to when it will all end no doubt fits the definition well, especially for a firm that has it origins as well as a chunk of its core revenues in foreign exchange interchange fees.
“Like most fintechs we're concentrating on profitability. 2021 should be a good year for us in terms of that. So that's what we're really aiming for is to make sure like all other businesses that you get through to 2022 and beyond.” he said.
Gilbert says Revolut had to change its models “slightly and concentrate much more on domestic spending and trying to encourage people to use the card for everyday spending” rather than just travel in the face of the pandemic.
“Interestingly the biggest area we saw spending was at Lidl [in 2020 in the UK],” he said.
“We're trying to make it an individual's everyday card rather than just occasional use. Despite slashing the marketing budget, we've seen good organic growth. It's been an interesting period.”
“I think we'll see a big surge again, in travel, etc, by the time that vaccinations all arrive and become effective and confidence returns.”
The priority, Gilbert says is continuing to grow the business organically and “get the costs under control” and get to profitability.
“It's still growing very strongly in terms of revenues. That's been a huge focus. And despite cutting marketing right back we're still seeing very strong organic growth in terms of both customers and spend, but a different mix of spend than we would have seen previously. But also, a very strong concentration on the cost side of the business.”
Interestingly, Gilbert adds, the push for profits comes from pressure from two camps.
One is shareholders, as you’d expect, but also from financial regulators.
“Regulators are very, very focused on profitability as well, as the sector becomes more systemic,” he said.
“Especially for a company like Revolut, which has 13 million customers. Three million in the UK, one million in Ireland. Regulators are very, very focused now on companies like Revolut which are becoming systemic.”
Revolut released its 2019 numbers in the summer. They showed the firm had seen a c.200 per cent uptick in revenues for the year but at the same time as losses tripled. Revolut did have a major advantage, however, up its sleeve with a well-timed $500m fundraise at the back end of 2019.
“It's absolutely great that fintech is growing to that extent, that we're now the focus of regulators, but also it's brought a renewed focus on businesses like us which is where I hope I can help a bit.”
What’s Gilbert’s advice for staying on the right side of the regulator?
“Do what they tell you. Don't fight with them. I've never found it a very good strategy to fight with regulators. Just do what they tell you to do. It's much simpler. And then usually they're very reasonable. We’re well-regulated in the UK. Regulators want dialogue. They want to know what's going.”
Banking on it
A key strategy for Revolut to grow its revenues and move to a sustainable footing is the pursuit of a UK banking license. It is currently an e-money institution, meaning it's authorised to handle money, facilitate business transactions and currency exchanges but it cannot offer some financial services and has no FSCS deposit guarantee.
It does also have a Lithuanian banking licence, which it obtained in December 2018, and is regulated by the Bank of Lithuania but anchoring its large UK base with that all-important license is key.
The plan for a UK banking licence is “still very much on track”, according to Gilbert.
It recently announced it was hiring Richard Holmes, another experienced City figure to lead the move.
“We've recruited Richard as the chairman of what will eventually be a ring-fenced bank in three or four years as it gets bigger. It will not initially be the ring-fenced. Richard is a veteran, Standard Chartered and before that American Express. He is a great recruit and will do a good job for us as spearheading that application.”
Gilbert also says that investment is an important area for the firm’s bottom line. It’s ‘trading’ business which includes zero-commission equities, crypto and commodities brokerage is “making pretty nice profits:“ but that the potential is greater still as with lending.
“Trading could be massive for us. Credit could be huge.”
Like many tech firms, growth is still a core survival strategy, not least to justify racy valuations. Revolut at its last fundraise implied a valuation of $5.5bn (£4.3bn). This puts it not far from the market capitalisation of Standard Life Aberdeen (£5.99bn) which saw £1.6bn of revenue last year.
Some of the fintech valuations do look a bit “a bit high” says Gilbert.
“A lot of it is driven by liquidity. There's this huge liquidity...until there is no liquidity. Liquidity can turn off overnight.”
“Those of us in the fintech space have to be careful about that, which is why I've described the have nots of the fintech sector. If you've got the money, you're gonna have a good period of time. I think it's going to be difficult to get more money. If you don't have the money, it's going to be a pretty difficult period for you.”