Revolut Is Testing the Limits of Finance

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(Bloomberg) — Racing to build what he calls the Uber of financial services, Nikolay Storonsky believes in keeping his foot on the accelerator. And watchdogs are starting to notice.

Storonsky is getting a taste of the scrutiny that lies ahead as he tries to upend the world of banking with Revolut, his 3-1/2 year-old startup. The U.K.’s financial regulator is examining why the digital bank last summer temporarily turned off a system designed to automatically block suspicious transactions.

“It has always been like, ‘we have to be compliant.’ But how compliant? It’s another thing, right?” Storonsky said in an interview from his office in Canary Wharf, the London finance hub where he runs Europe’s fastest growing financial technology company.

Perhaps more than anyone else, the 34-year-old is testing whether the “better to beg forgiveness than ask permission” attitude of Silicon Valley entrepreneurs can succeed in the highly regulated world of finance.

Storonsky has drawn analogies between Revolut and Uber Technologies Inc. and he’s blogged admiringly of Airbnb Inc., both known for their whatever-it-takes ethos and their willingness to bend or ignore inconvenient regulations. A neon sign on one wall of Revolut’s office exhorts employees to “Get Shit Done!,” a reflection of Storonsky’s belief that the future of retail finance is a winner-take-all race.

The potential risks of the rapid expansion emerged when the U.K. Financial Conduct Authority said it was looking into allegations raised on Feb. 28 by British newspaper, The Telegraph, that Revolut switched off a key compliance software for three months last summer.

On the same day, tech publication Wired quoted former employees and job applicants recounting burn-out inducing work conditions, bullying managers and potentially illegal hiring practices. Earlier in February, Revolut was caught using phony statistics in an advertising campaign.

Several of Storonsky’s competitors worry that if the situation worsens, it could taint the entire sector in the same way a 2016 scandal at LendingClub Corp. in the U.S. cast a pall over the peer-to-peer lending industry. Backed by investors including Russian billionaire Yuri Milner, Revolut has grown faster than rival app-based banks Monzo and Starling.

It was valued at $1.7 billion at its last fundraising and now has over 4 million customers after new accounts tripled in 2018. That’s about three times more than the two lenders combined and the same number of customers as foreign-exchange business TransferWise, which is four years older.

Six fintech executives who spoke to Bloomberg on condition of anonymity said there are concerns that trouble at Revolut could shake investor confidence in the industry. Nowhere is that risk more keenly felt than in London, which has gone out of its way to encourage financial service entrepreneurs to experiment with new business models.

“There are signs of overaggressive expansion,” Giles Andrews, the co-founder and chairman of the digital bank Zopa Ltd., said during a panel discussion at a fintech conference in London on Monday, referring to startups that cut corners in legal compliance, without naming any. “You wonder what you’re going to find if you look underneath the hood.”

Revolut’s brash approach reflects Storonsky’s own competitive nature. A Russian-born trained physicist and champion swimmer, he spent seven years working as an equities derivatives trader at Lehman Brothers and Credit Suisse Group AG before starting Revolut. He created the company, he says, because he was frustrated by the exorbitant fees credit cards charge customers while they travel. His solution: a pre-paid debit card with no foreign transaction fees.

It was an instant hit and gave him and Revolut co-founder Vlad Yatsenko the momentum to expand quickly into other services: international money transfers, budgeting tools, travel and mobile phone insurance and cryptocurrency trading. Within months it will unveil savings and checking accounts, loans and commission-free stock trading.

“The question is, are they running so fast that certain things get overlooked?” said Tom Keatinge, the director of the Centre for Financial Crime & Security Studies at London-based think tank RUSI. “My general concern is that fintech companies will choose to spend money on marketing and technology rather than anti-financial crime compliance.”

A lot of the scrutiny comes down to a strategy at the heart of Revolut’s business model: relying mostly on machines, rather than humans, to identify suspicious transactions. It has about 800 employees serving customers in 30 countries, about 150 of whom are compliance analysts—people responsible for screening new account applicants for money-laundering, fraud or sanctions busting.

“Unless you solve financial crime and compliance issues through automation, our business won’t scale,” Storonsky said.

Problem is, many important sources of data, such as emails, paper documents, and PDF files, aren’t easily vetted by computer programs, according to Peter Norris, the founder of Obiter Consult Ltd., a British firm specializing in helping businesses combat financial crime. Making a thorough check is even harder when a potential customer’s information is spread across several countries.

“Revolut will need to do much more to demonstrate its own machine-learning algorithms and only 150 humans can handle the risks,” Norris said.

One former Revolut compliance analyst who quit last year said he had to screen 300 to 400 new accounts daily and there wasn’t enough time to check all the documents properly. Analysts were urged to open accounts and then lock them later if any offences were discovered, he said, declining to be named because he signed a non-disclosure agreement.

Storonsky called compliance a “journey” and cited one statistic where Revolut is doing well: It loses less than one penny per 100 pounds spent on its payment cards due to fraud, well below the seven-penny average loss among U.K. financial companies in 2017, according to trade association U.K. Finance.

He also defended a decision to briefly turn off one feature of the compliance software designed by New York-based Regulatory DataCorp Inc., or RDC, that it started using last summer. The system automatically checks whether payment recipients are on international sanctions lists and, if it identifies a match, the transaction is flagged to compliance analysts and the payment is automatically stopped.

But, Storonsky said, the software produced too many false positives. Complaints about blocked payments mounted. In response, Storonsky said, Revolut decided to alter the system so that suspicious transactions would still be flagged, but the payments would, in the meantime, be allowed through. He said Revolut worked with RDC to “recalibrate” the software and, after three months, re-activated the automatic account blocking.

A whistleblower brought concerns about how the decision was made to Revolut’s board, but there were no allegations payments to sanctioned individuals had been allowed, Storonsky said. A subsequent board investigation found no regulatory requirements were breached, he said.

While it’s too early to assess the damage, the lender has been under pressure to recruit more experienced (and older) bankers to bolster its credibility, according to one investor with direct knowledge, who declined to be named. To meet the requirements of its brand-new banking license, Revolut hired several finance veterans, including former Silicon Valley Bank executive Bruce Wallace, who will run the board’s risk and compliance committee.

For Storonsky, the priority is still to make Revolut into “one of the largest financial-services companies in the world,” yet he concedes the banking world poses challenges even his most daring Silicon Valley forerunners didn’t face.

“To cut corners, it is just not possible in our environment,” he said.

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