Highly profitable upstart hopes to be operational within 12 months
British fintech Revolut has had plenty of good news to report recently. Earlier in the week it reported full-year pre-tax profit of £438 million after group revenues nearly doubled to £1.8 billion. And, if Nikolay Storonsky, Revolut’s CEO and co-founder is right, the giant electronic money institution is getting a lot closer to being able to offer mortgages in the UK.
The company applied for a banking licence in 2021, but its success has actually been holding it back. “U.K. banking licenses are being approved for smaller companies,” Storonsky told CNBC.
“They usually approve someone twice every year (they typically tend to be smaller institutions) Of course, we are very large, so it takes extra time.”
That having been said, mortgages are definitely in the pipeline for Revolut as it is now planning to offer mortgages in Ireland from the first half of next year. The only potential fly in the ointment is potential regulatory actions by the Central Bank of Ireland.
The financial services company, with approximately 2.7 million Irish customers, intended to begin offering mortgages in Ireland in the first half of the next year.
Revolut operates under a Lithuanian banking license, allowing it to provide credit services in Ireland through a process known as "passporting." However, financial experts have noted uncertainty regarding the extent of oversight the Central Bank of Ireland will impose on Revolut's mortgage operations.
Some experts argue that despite Revolut being regulated from Lithuania, the Central Bank of Ireland would still need to oversee its mortgage activities.
“We’re very keen to get mortgages launched next year in Ireland,” Revolut Europe chief executive Joe Heneghan told The Irish Times. “Our team is working very hard on it. I would probably say the first half of next year is realistic. The market is attractive.”
Such an entry could disrupt the market, where AIB, Bank of Ireland, and PTSB currently issue 93% of new mortgages.
Revolut already provides current accounts, loans, credit cards, motor insurance, savings accounts, investments, and buy-now-pay-later loans.
Banking sources have indicated that Revolut might not be able to offer lower interest rates than those currently available in the market. The firm would likely be regulated by a mix of the Lithuanian Central Bank, the European Central Bank (ECB), and the Central Bank of Ireland.
Current regulations in Ireland, which require mortgage lenders to set aside a certain amount of capital when issuing a mortgage, are expected to apply to Revolut as well. “This means they will not be able to offer supersonic low mortgage rates,” one source mentioned.
These capital requirements are seen as restrictive and exist because lenders face significant challenges if they need to repossess a property due to borrower default. It took Nua Mortgages and MoCo several years to obtain Central Bank authorisation.
A spokesperson for the Central Bank of Ireland stated that they do not comment on business plans of financial institutions or potential authorization applications. They did confirm that if Revolut were to offer mortgages, it would need to comply with the Irish Consumer Protection Code and the Code of Conduct on Mortgage Arrears. Rules on loan-to-deposit and loan-to-value ratios for Irish mortgage providers would also apply to Revolut.
Revolut stated, “Revolut is already approved to provide credit in Ireland, but, notwithstanding that, we always work very closely with the Central Bank of Ireland to ensure they are fully able to appraise our plans and we respect all of their feedback in building out any new offering.”
The company plans to offer mortgages directly through its app but is considering establishing a call centre to assist applicants and mortgage holders, rather than relying solely on online chat support.
Experts suggest that due to the complexities involved in mortgages, having a dedicated phone support line would be a crucial decision for Revolut – a company that has so far managed to shave costs by making most customer interaction online.
Revolut has funds available for mortgage lending, meaning it would not rely on expensive money markets for ECB financing. At the end of last year, its €634m loan book was just 3% of its €20bn in customer deposits across Europe.
This funding structure is advantageous compared to some lenders struggling to establish themselves in the market, such as ICS Mortgages, Finance Ireland, MoCo, and Nua Mortgages, who rely on high-cost market funding. Credit unions offer competitive rates but are limited by regulations on the volume of mortgage lending they can conduct.
Revolut’s mortgage plans come at a time when Avant Money, owned by Spain's Bankinter, has announced its intention to launch a full banking service in Ireland soon. Increased competition from Bankinter and Revolut may eventually transform the traditional mortgage market in Ireland.
The potential arrival of Revolut's mortgage services highlights the ongoing transformation in Ireland’s banking sector, especially after the exit of major players like KBC and Ulster Bank. Bank of Ireland, AIB, and Permanent TSB have significantly benefitted from this consolidation, acquiring substantial mortgage assets and customer bases.
With the departure of these major players, the market has seen a dramatic concentration. Bank of Ireland acquired €8bn in mortgage loans from KBC, while AIB and Permanent TSB divided Ulster Bank’s mortgage and commercial loan books. This has resulted in AIB's share of new mortgage loans rising to over 30%, and Permanent TSB's share growing to more than 23% from just 16.3% a year earlier.
The reduction in competition, coupled with the European Central Bank’s aggressive interest rate policies, has led to record profits for Ireland’s banks, often at the expense of consumers through increased rates and low deposit returns.
In 2020, Ireland’s major banks attempted to counter Revolut's growing influence with a mobile payments app, Synch. However, the project was eventually abandoned, unable to compete with Revolut’s comprehensive service offering.
As Revolut gears up to potentially disrupt the mortgage market, it serves as a reminder to Ireland’s banks that they are not immune to international competition, which could drive further innovation and consumer choice in the sector.
