Why Revolut needs a banking licence

It's all about the difference between an emoney provider and a bank ...

I’ve been having an ongoing debate with a Revolut fan about the fact that they have an emoney licence, as an EMI (Electronic Money Institution), and that they are not a bank in Britain.

It’s part of the ongoing debate about their attempts to get a full banking licence from the FCA and, so far, failing (they did get one the other day in Mexico!).

The question asked by Max Karpis, an early Revolut investor, was: Hey Chris, what do you think about this Paul's debate?

The Paul in question is my colleague at the BBC Paul Lewis, who has regularly tweeted (or do we say X’d these days?) that Revolut is not a bank and therefore has issues with lending and deposits.

Max agrees that Revolut’s lending is limited if they have to operate as an EMI licenced firm, due to capital requirements, and that is why their focus is on getting a bank licnese. However, he disagrees on deposits as, working with licenced banks, they can be just as trusted as an EMI for savings under their licence. To be exact, his comment was that “Revolut in partnership with banks offers FSCS savings accounts through the app only, he totally ignores the fact”.

The money is safeguarded?

I pushed back and said no. This is made clear by many companies in this space, such as N26 who clearly state on their website that “the key difference between an e-money licence and a banking licence is where the customer's money is held, as well as how it is protected. E-money firms must use a partner bank to hold funds, and your money isn't protected by the European Deposit Guarantee Scheme (DGS).”

Furthermore, it is crucial to understand that EMIs do NOT offer bank accounts, because they cannot receive deposits in the same way as banks, and that is because they must have deposit guarantees, i.e. customers funds up to €100,000 are not protected under the European Deposit Insurance Scheme.

It’s all about trust in the institution to protect your money and, if they lose it, to reimburse you. An EMI, even with safeguarding deposits, does not have that requirement.

More than this, an EMI may be authorised to issue electronic money and provide payment services, but they are not allowed to lend money. Transact Payments make this even clearer on LinkedIn:

“The fundamental difference between the banking licence and EMI licence is the ability to lend money. EMIs are prohibited from offering any form of lending and must ringfence client funds. This is different to the traditional business model of a bank, whose profit margin relies on generating income on deposits through offering lending products.

“Due to meeting such rigorous safeguarding criteria, customer deposits with a bank are also guaranteed by a deposit guarantee scheme, whereas with the EMI they are not.”

Max argues that an EMI is as safe as a bank and only need a licence to lend.

This is why Revolut wants that banking licence in the UK. They have one in the EU via Lithuania and now in Mexico but, with 40 million users and growing rapidly – along with a valuation of more than $25 billion (as of April 15 2024), which is a 45% rise on the year before – the UK banking licence is key to their expansion plans. After all, seven million of their forty million users are UK based.

My view? An EMI is not as safe as a bank as, if they were, why does Revolut need a banking licence. A bank guarantees its deposits; an EMI does not or, rather, not in the same way.

What do you think?

First response on X: 

Isn’t it under CASS in the UK and consumers actually have more rights than if a bank (no limit on protection)?

The principal objective of the FCA’s ‘CASS’ (or the ‘Client Assets Sourcebook’) Rules is to keep Client Assets safe in the event of a firm’s failure. A fundamental requirement of the CASS Rules is that firms must keep client money separate from firm money in segregated client money bank accounts and register custody assets appropriately. This ensures that client money and custody assets are ring-fenced in the event of the insolvency of the firm.

Source: KPMG