Matt Cooke, McKinsey: From McKinsey’s Banking & Securities Practice, I’m Matt Cooke, and this is Talking Banking Matters—new, short audio content for leaders in banking, securities, and beyond. For this episode—taken from a new occasional series from our Payments Practice on payments and fintech—our New York–based senior partner Vijay D’Silva spoke to Mikko Salovaara, the CFO of Revolut. Here’s Vijay to tell you more.
Vijay D’Silva, McKinsey: In the summer of 2021, Revolut became the United Kingdom’s most highly valued fintech, when its latest fund-raising round gave it a valuation of $33 billion. Revolut started back in 2015 and initially become well known for offering fee-free foreign-exchange services to consumers. But it now offers a growing range of products, including payment cards, cryptocurrencies, equity trading, and travel services. The company expects to become a full-on neobank soon, and it has banking license applications pending in the United Kingdom, the United States, and Australia. My guest is Revolut CFO Mikko Salovaara, who joined us from his home in London. Mikko himself has an interesting background that we will get to later. But I first asked Mikko to start out by talking about how Revolut has weathered the pandemic and its progress toward building a payments-based ecosystem.
Mikko Salovaara, Revolut: Certainly a lot has been going on with the business. There was an extraordinary bit of uncertainty, especially as our business was heavily tied to travel, as we offered FX [foreign exchange] at interbank rates on our card and payments business, which we saw go down by about 40 percent during the height of COVID. But we saw tremendous diversification of our business as we came out into Q3 and Q4 of last year, especially around wealth and trading, and our subscriptions business, where we basically offer different levels of subscriptions, or tiers, of the product to customers. We’ve been growing at a tremendous pace—more than 130 percent in the first quarter of the year.
That growth has extended through the first half. We’ve reached over 17 million customers. We’ve got a gross profit growing at more than 300 percent. And we’re strongly in the black.
As we look forward, we’re continuing to invest across two planes, one being the products we have rolled out that we continue to iterate on, [and the other] the products that we have in our pipeline. Most recently, we’ve launched a salary-advance product in the UK. These are the kinds of products we have to accelerate toward our vision of being a financial super app and being at every intersection of individuals’ financial life—not only individuals but also businesses’ financial life through our Revolut for Business platform—and ultimately, to create an ecosystem where we can combine those two individual platforms.
Vijay D’Silva: One of Revolut’s key strengths is being able to develop products quickly, which we will talk about later. But with this kind of capability and dozens of options available, the question that first comes up is, How does Revolut prioritize which products to build and which ones to defer?
Mikko Salovaara: I come at this kind of bottom up and top down in a way. Top down, in Europe, it’s very difficult to be a single, monoline fintech. The profits aren’t there, especially if you start with payments, because interchange is so low. And it’s an obvious business strategy to have low customer acquisition costs to cross-sell products from an initial product–market fit and to use that to create a sustainable business. In other parts of the world—in the US in particular, in certain fintechs—it’s possible to be a monoline business. With the example of interchange, in particular, being high, if you don’t hit the Durbin cap [on bank fees for debit-card purchases], you can have a different business model. But in Europe, it’s going to be difficult if you want to be starting with a current account to not be offering some range, at least, of financial products.
Then if you look toward examples of success around the world, you can see what has happened in China, Southeast Asia, with the kind of super apps we’ve seen there: starting from a different position in terms of the “card rails” [networks] not being there in China, and Alipay and WeChat being able to supplement the card rails—being, in effect, the digital payments network before credit cards had any sort of penetration—and then building from that, again noting that they’re the lowest-cost distributor of financial products.
In one sense, it’s difficult to be profitable if you’re not many things at once. In another sense, it’s clear that the business model works. It’s also part of achieving the vision we have of being able to consolidate an individual’s financial life and a business’s financial life all in one place.
Vijay D’Silva: Inevitably, most companies in their growth phase must look at the trade-off between profitability and investing in growth. After all, Amazon famously took nine years before it recorded its first profitable year. In contrast, Google took only three years to break even. Here’s Mikko on the topic of profitability.
Mikko Salovaara: The way we look at it is three macro business lines: our retail business, our Revolut Business business, and then any market making we might do. Within those, we break it down into eight subproduct lines. If I look at all eight of those, they’re all somewhere between 60 and 90 percent gross profit margin of businesses.
The variable margin of our businesses is really wonderful, and I think we did an amazing job last year, basically coming out of COVID, of in effect negotiating our way into that position, negotiating with many service providers that we had to get there. If you look at 2018, our gross margin was about 14 percent—something like that, 15 percent—and we ended last year with gross margins of 61 percent, and they’ve increased since then.
So we’re in a pretty good spot from a variable-margin position, and we’ve been profitable this year. I think we’re going to continue to be profitable. And I think the question is almost in reverse: Is there an opportunity to become unprofitable in terms of moving more strongly into inorganic customer acquisition? It’s something we haven’t really done thoroughly in the past.
Vijay D’Silva: Crypto is unquestionably one of the major trends this year, and for anyone attending Money20/20 in October, there was no shortage of crypto firms represented. Revolut, like many large financial firms, started offering crypto trading in the US in July 2020, and it also saw a big jump in crypto-related revenues. But even though most firms now assume that crypto is here to stay, predicting where it will be is still pretty hard.
Mikko Salovaara: I can tell you what we do in terms of projecting [the future of] crypto, which is that we don’t. We assume it’s a very volatile business line for us. There are moments where it’s a huge contributor to revenues, and there are moments where it’s almost nothing.
We think individuals want to have access to crypto, so we’re going to facilitate that. But it’s not at the core at our business strategy. It’s not the only bet we’re making. It’s one of many bets.
Vijay D’Silva: One familiar product for most financial firms is offering credit, and there is no shortage of consumers looking to borrow cheaply and conveniently. Today, we’re still in a benign environment with low credit losses and low interest rates. On the other hand, the financial-services graveyard is littered with companies that rapidly grew lending businesses, only to be left hanging when the credit cycle turned.
Mikko Salovaara: We think it’s an enormous opportunity, but we’re not eager to exercise the option too quickly. We want to build into it at the right speeds so we’re building our risk management at the same time. And we’re gathering data, and we’re correctly assessing what consumer needs are and developing products that should lead us to believe we have a right to earn excess returns on capital.
You won’t see us ramp up our credit book. If anything, we’re going to have the classic liability overhang for the foreseeable future. But if you look five years from now, I wouldn’t be surprised if credit was at least 20 percent of our revenue or something like that, just because of the size of the business and the obvious opportunity to monetize the customer relationships while also providing a key financial service to our customers.
It’s definitely a lower-margin business, and the cost of risk is there, and the need for capital is there. When you look at the future of our company, it’s not going to be anything like the majority of our business, because the opportunities on everything else are just as big.
Vijay D’Silva: Over time, Revolut’s ability to grow will depend on how well it scales its operating model, especially as it expands into the US and other markets. Historically, Revolut has used the UK as its testing ground for new products, which it then adapts to other countries. But that might need to change.
Mikko Salovaara: In terms of the product development teams, we have a remote-first approach. And then our developers and engineers are relatively widely distributed. Certainly, the single-largest concentration is in the UK, but we have great access to talent in the UK, in Western Europe and Eastern Europe, and places like Russia and places in Asia. And we’ve started to build out our presence in the US, as you’ve noted, which I think is a key competitive advantage.
We hire something like 20 or 25 engineers a month. That means you have to have a pipeline of something like a thousand. So in terms of growing the business, we’ve really modularized the hiring process and the team development process.
Teams are quite fungible. It doesn’t really depend on the geography, with the exception of the core commercial team. Actually, with the exception of two sets of teams. The local commercial teams—people that are directly related to execution of marketing or growth for a particular region—obviously are going to be in that region. It’s the same with any positions that are required by the regulators—people you might expect from finance, legal, or risk. They will sit in the local area where they are. But product development, by and large, can be happening anywhere for us, which is a great thing to have.
I would say that the business model we have, at least to me, makes a lot of sense. We structurally have shown that we’ve got the right people and that we build the right products. Technology is at the core of our DNA, and we’ve learned how to succeed in a regulated space. And now we’ve taken down the barriers to entry, in a way. That’s not going to happen immediately, but either the incumbents are going to have to change, or we’re going to keep gaining market share.
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Vijay D’Silva: Looking ahead, while Revolut has bet on the strength of its product capabilities, its future growth will depend also on building its marketing muscle, both in acquiring new customers and in expanding its share of wallet with existing customers.
Mikko Salovaara: It’s interesting that, if you look at a lot of competitors, their core strength has been much more on branding and marketing. Ours has been much more on product development. We’ve been wonderfully lucky to have the kind of virality that we’ve had, and we’ve really put our heads down and focused on just launching new products that are great products. From a people perspective, we’ve needed to get the right people in place who are capable, who have the experience of having done that in other places, to be able to ramp that up at scale.
When you look at Q4 and 2022, a lot of the story for us is going to be about fine-tuning the machine we have with performance marketing, more traditional marketing, and other growth initiatives. The things I think are big opportunities for us that we haven’t fully dipped our toes in, which shouldn’t really be a surprise, are credit on the one hand and insurance on the other—some of the largest markets in finance globally, in other words. Other than that, it’s continuing with these more fee-income-generating businesses and any kind of ancillary market making that we would do from operating our exchanges across FX, equities, crypto, commodities.
Vijay D’Silva: Revolut is taking this logic to tackle its biggest market—the United States. The US is seen as a highly competitive market and has typically been a big and risky bet for a lot of global firms. In fact, one major European fintech recently withdrew from the US after two years of trying. Finding the right US entry strategy is something we have looked at for some time. Some believe that speed is of the essence, and it’s better to fail fast. Others believe that you only get one shot, and if you get it wrong, it’s hard to recover.
Mikko Salovaara: I think what you’ll have seen with us in the US is that it’s a little bit like going slow to go fast. We’ve been honing the model, and as soon as we feel we’re ready to go at scale, we certainly have the resources to do that. When I say, “getting things ready,” I mean it’s getting the people in place, getting the licenses in place, getting the assets from a marketing perspective in place, and making sure the products have parity.
It’s obviously not the same as we can go with in Europe. In the US, with a single currency, with a lot of people that don’t travel, especially during COVID, you can’t say, “Hey, we offer this great FX product that we basically take the entire margin the banks have been charging you and just give it back to you.” So we’ve done a lot of looking into this.
One way we’re approaching it now is to note that there are 40 million, or something like that, expatriates in the US. We can refer to them by different names, but it’s basically a population of people that weren’t born there. We think we have a great proposition for that subpopulation, because there are a lot of money transfers, especially around remittances. The single biggest remittance corridor, as I’m sure everyone knows, is the US–Mexico remittance corridor. Another big one is US–India. Basically, we have set ourselves up so that on the remittances for anyone using, for instance, the US–Mexico remittance corridor, we’re going to charge a fixed percentage fee of 30 basis points. That’ll be a minimum of 30 cents and a maximum of six dollars. So you can imagine that a customer would be able to send a thousand dollars to Mexico for three dollars. That’s dramatically lower than the average fee charged in remittances.
The second thing—and this is sort of the global proposition we have—is that there’s almost no one trying to be a fintech super app in every country in the world, globally. There are people trying to do it in certain countries or their continents, but not globally.
If you think about the ease of use of our product, then one of the easiest things to do is to send money from one customer on Revolut to another. If we’re able to launch the way we are setting out to do in India, Mexico, Brazil, and all these countries and then also to penetrate the remittance corridors and be on either side of them, and basically say to people that you can do it for free as long as it’s the same currency—or for free even if you’re exchanging currencies as long as you’re a subscriber, and even if you’re not a subscriber, you’ll have some fee-free allowance, and then you’ll have a small fee charged—we think that’s going to create kind of the virality and network effects to at least get a foothold in these different markets, not only in the US but the other markets as well.
From there, we’re going to be able to cross-sell our products.
Vijay D’Silva: With this much momentum, one question is when to go public. In 2021 alone, we saw Coinbase, Affirm, Marqeta, Robinhood, Remitly, Nubank, and Payoneer all go public at significant valuations. Companies traditionally have gone public either to raise money for early investors to cash out or simply to raise their profile with both employees and the public. But this balance has also been changing as private capital increases. According to Pitchbook, global venture funding was on track to hit an all-time high of $580 billion in 2021, and it more than doubled year on year in the US alone. Individual companies have been able to raise larger and larger sums privately before needing to go public.
Mikko Salovaara: We just raised money, which buys us a lot of optionality, so there’s no imminent need to be a public company. And being a public company doesn’t really change our business at all. The only thing it might do is, depending on where you list, it could be a pretty big marketing event.
And obviously, up to the preparation of becoming a public company, there are a lot of hurdles you have to meet or standards you have to meet in terms of processes, controls, and systems—things like financial reporting financial controls, internal controls, corporate structure, governance, all this kind of stuff.
Our approach has been that we want to be ready to be a public company and to meet those public company standards alongside meeting bank standards, obviously, as we apply for all of these licenses. But we have no timeline, and we don’t feel an explicit need to be a public company. In terms of the thought process, obviously that’s one avenue for raising additional capital, should we need it. But we’ve demonstrated we can do that in the private markets as well.
Maybe reputationally, it increases our reputation a bit as an employer, as a counterparty, and as a business partner. But on the flip side of that, it can be a distraction as well for the employees, and you go around having this constant KPI [key performance indicator] for how the market perceives you, and that’s not always ideal either. So we’re definitely aware that companies go public, and I think eventually we will be a public company. But it’s not the number-one priority as we stand today.
Vijay D’Silva: Finally, I wanted to get to Mikko himself. Before joining Revolut, he was already one of the youngest CFOs of a global company. I was curious about what got him to this point.
Mikko Salovaara: I’m from New Jersey originally. I grew up on the East Coast of the United States. I joined a firm called 3G Capital when I graduated from school. I worked there in investments in the private- and public-equity sides of 3G’s business. Then went to work at Kraft Heinz, one of the portfolio companies for 3G. I did that in Asia—out of China and then out of Singapore. Then I moved to Chicago, returned to 3G, and then my wife and I moved to London. I worked briefly with Elliott Management, the hedge fund, and then joined Revolut.
For me it was really three things. On one hand, I had never really participated in the financial-services business, nor in a tech business. But I had studied them, and I thought money and credit were fascinating and markets are fascinating, and I thought I would learn a lot. So that made an obvious choice. The second was I believe that technology is really going to disrupt financial services. And the third was I got to know a lot of people through the interview process—particularly Nik [CEO Nikolay Storonsky], who I got to know a lot better last fall. I found them to be unique individuals, particularly Nik, who is one of the most ambitious, logical, driven individuals I’ve met. I thought they would be great people to work with, work for, and learn from.
Vijay D’Silva: In the months after we talked, Revolut continued to grow rapidly. For instance, if you look at downloads from the Google App Store, by late November, it emerged that most banks and competing fintechs in the UK had seen a fall in their number of app downloads in 2021 versus the same period in 2020. In contrast, Revolut’s app downloads actually increased by an astonishing 38 percent. Looking ahead, the company now needs to continue launching new products and more efficiently acquire new customers while also evolving how it operates as a global firm. If it does that, it has a shot to finally realize its vision of becoming a successful global financial super app.
Matt Cooke: It’s Matt Cooke here again. On behalf of McKinsey’s Banking & Securities Practice, thanks for listening to Talking Banking Matters today. We’ve got a series of conversations planned, so we look forward to you retaking your front-row seat to listen in on more industry leaders from the world of fintech, banking, and digital talk about their work shaping the future of this industry. But for now, wherever you are today, thanks again for listening.
Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.
