Revolut to take on payday loans industry

The loss-making fintech company is in danger of over-reach as it expands into the bottom end of the loan market ahead of its float

REVOLUT is seeking to win customers from payday lenders after launching a product that allows employees to access their wages early.

The £24bn fintech company will let users draw up to half their accrued sal- aries ahead of time through the scheme, called Payday, and is in talks with several businesses to sign them up.

It will advance staff money from their pay packets for a fee of £1.50 per transaction amid a scramble to convince more customers they should pay their salary into a Revolut account.

Salary advance schemes are not covered by credit rules and remain unregulated

in the UK, although the City watchdog warned they could encourage borrowers to enter a cycle of debt.

Revolut – which last month raised $800m (£582m) in a deal valuing it as Britain’s biggest privately owned tech business – is seeking to develop a “superapp” of financial products featuring everything from current accounts to cryptocurrency trading and holiday rentals. It applied for a full UK banking licence in January.

Adam Davis, of consultancy 11:FS, said: “Revolut is not big in lending, except in east Europe, but this is lending they can facilitate with less complexity, from a regulatory perspective.”

The salary advance product sets Revolut up as an alternative to payday lenders that charge very high interest rates. One of the most notorious, Wonga, collapsed in 2018. It also provides an alternative to the surge in “buy now, pay later” rivals, such as Klarna, which was valued at $46bn at its last financing.

Britain has a lousy track record of transforming fledgling technology start-ups into companies of genuine scale. There was Arm – but ministers, desperate to prove their Brexit credentials, allowed the chip maker to be flogged to Softbank; Deepmind was swallowed by Google before it reached the top tier; and Autonomy, which has been dismantled and is now the source of a politically charged bid to extradite founder Mike Lynch to America.

The UK is carving out a promising reputation in fintech, as demonstrated by the recent blockbuster listing of proven payments specialist Wise. With an £8bn valuation it was the biggest public share offering of a technology company London has produced.

But in the rush to unearth the next worldbeater, there is a risk that red flags are overlooked, as the backers of David Cameronendorsed lending shop Greensill and Germany’s Wirecard found out to their great cost.

Those tempted to pile into the looming float of Revolut will need to be alive to the potential risks as expansion takes the company into more speculative areas of finance.

After a recent fundraising valued the digital banking app at an eye-watering £24bn, management are under pressure to justify how an outfit that is just six years old and where losses doubled to more than £200m last year could possibly fetch such a rich price tag.

With overseas expansion already well under way, and profits from mainstream banking proving ever-more elusive, the temptation is to move into services where the returns could be higher but equally the downside greater – markets that a high street bank probably wouldn’t touch.

In the last year alone, Revolut has launched a rival to Airbnb called “Stays”; moved into precious metals trading; and somewhat inevitably made a belated attempt to surf the cryptocurrency wave.

The latest product on the menu allows workers to have their salaries drip fed to them instead of waiting until the end of the month, the idea being that it helps to smooth out cash flow. Revolut can also position it as a more socially acceptable alternative to the pay-later arrangements offered by Klarna and others.

Though it doesn’t come with the same sky-high interest costs – Revolut plans to charge £1.50 per “loan” – the Financial Conduct Authority has expressed concern that borrowers don’t understand the true costs, meaning they can become more onerous than payday loans in some cases, while campaigners claim such schemes can push people further into debt.

The danger is that what Revolut is offering is really a payday loan by another name – calling it “Payday” probably won’t help – a sector that fell foul of regulators years ago, and was notorious for racking up huge defaults from customers.

Challenging the bottom end of the loan market, an area that comes with huge reputational and financial risks, hardly seems like a path to riches.

Revolut has been called “the Amazon of banking”, but there are unfortunate shades of Wework, the souped-up office space provider whose founder Adam Neumann dreamt up increasingly ambitious schemes in the pursuit of profit. Wesleep (boutique hotels); Wesail (yacht charters); and Webank (no explanation needed) were just some of the new ventures he envisaged would become part of an umbrella “We Company” that would “elevate the world’s consciousness” before it ultimately crashed and burned. Revolut creator Nikolay Storonsky must beware of similar overreach.

‘The danger is that Revolut is offering a payday loan by another name’

Banks hold out an olive branch

The financial crisis, along with the rapid rise of digital banking, provided the perfect cover for the high street banking giants to pull out of thousands of towns and villages up and down the country.

But it is a myth that bank branches are no longer needed. Not everyone has internet access or a smartphone, and there are lots of people who struggle with the technology. The humble bank branch remains a vital service for the elderly, the vulnerable and rural communities.

Shared branches, then, are a welcome initiative – but only in principle. It’s not right that organisations with the financial might of Lloyds, Barclays and Natwest have pulled out of hundreds of towns and villages without providing some sort of alternative. And if they fail to come up with an alternative for the places they’ve abandoned, then bosses can’t complain if the Financial Conduct Authority follows through with plans to prevent them from absconding, however draconian such an intervention may seem.

The industry is in rude health again after making it through the pandemic relatively unscathed so there can be no excuse for leaving customers stranded. Calls by campaigners for every town to have at least one branch seem perfectly reasonable.

A network of hundreds of community banking hubs that customers of all the major banks can use for essential services such as paying in or withdrawing cash and other basic transactions, could be a genuinely laudable solution but it must be properly policed.

The concern is that such a system could accelerate closures in other areas, if the banks realise there is a ready-made fallback option that enables them to escape scrutiny and criticism.

That can’t be allowed to happen. Customers are the same taxpayers that bailed out banks during the financial crash. With sector profits rolling in again, they deserve better.