Inside UK startup bank Revolut’s revenue model

In the war for market share among challenger banks, U.K.-based Revolut has hit a big milestone. The three-year-old startup announced this week that it broke even for the first time in December, with 1.5 million customers and a monthly transaction volume of $1.5 billion -- a 700 percent increase in 12 months. The company, which currently operates in Europe, lets customers hold up to 25 currencies. Its growth is based on payments revenue along with a strategy to partner to offer add-on services including travel and smartphone insurance and loans. "Our revenue model globally is payments-centric," said Dan Westgarth, head of Revolut USA. "We receive renumeration every time our card is used; that's what keeps our business afloat, and we're wrapping around on top of that third-party services, and we have a business and corporate product." Revolut claims to be the first U.K. challenger bank to reach break-even status (OakNorth, however, reportedly reached profitability in 2016). Monzo, a top U.K. challenger bank, hasn't yet broken even while Tandem and Starling Bank have yet to see a month without losses. Revolut's business model built off a multi-currency account, a foreign currency transfer service, instant credit through the Revolut app, and low-fee insurance (for example, travel medical and dental insurance costs less than $2 per day). Offering core banking products with add-on products is a way Revolut can set itself apart in a market where digital-only banking startups closely resemble one another and incumbents try to copy them. The layering of third-party services on top of a core banking product allows for multiple revenue streams as the company grows its product offerings and expands to other markets, with the U.S. in its sights later this year. It's also letting customers hold cryptocurrencies. In December, it started to let customers buy, sell, trade and hold three cryptocurrencies (bitcoin, ethereum, and litecoin) within the platform alongside 25 fiat currencies. The company didn't say how many of its customers hold cryptocurrencies. "[Digital banks] need something to differentiate, especially in more developed North American markets," said Mark Atherton, group vice president of financial services at Oracle. "The heart of banking is lending, and if you can get into lending or other profitable products like insurance and able to do that with a very low cost infrastructure, then you're able to offer fees and products the biggest banks can't." Revolut said it can offer cut-price fees due to lower overhead costs. Its fee structure is transparent -- a fresh counterpoint to many banks. It's based on a "freemium" model, with a free basic account whose customers can opt to pay for add-on services, and a premium tier that costs just under $10 per month that offers unlimited currency transfers, free travel insurance and other promotions. [caption id="attachment_23013" align="aligncenter" width="750"] Revolut fees (Source: Revolut)[/caption] Revolut's free offering can draw in new customers, who could be enticed to move to the premium service -- a powerful lead generation technique. The startup's premium offering resembles an Amazon Prime-style checking account model, which is a subscription-based checking account that includes services like insurance, identity theft protection, roadside assistance and product discounts for a modest (under $10) fee. A recent Cornerstone Advisors report concluded that customers are willing to pay an account fee if they feel they're getting value from the add-on services, and customers with fee-based accounts are more likely to refer friends and family. "Why would consumers show more interest in a fee-based account from Amazon than a free account? One reason is surely the value-added services bundled in," the report says. But there’s another reason: consumers have learned (the hard way) that a free checking account isn’t really free. [caption id="attachment_23016" align="aligncenter" width="703"] Source: Cornerstone Advisors[/caption] Revolut's focus has been on growth rather than profitability, Westgarth said. Its product diversification strtegy is a way to keep customers engaged in its ecosystem, and to generate referrals. The company said it has minimal marketing spend and its plan is to continually evolve the product to customers' expectations. In a tight challenger bank space, a digital-only bank that doesn't offer opportunities to cross sell doesn't have much hope of survival. "There's definitely going to be consolidation [among digital-only banks]," Atherton said. "The issue is customer capture -- how are you going to do something different and leverage your better economic model?"