Digital-only fintech bank Revolut, last valued at $33 billion (£24 billion) during a recent $800 million funding round led by SoftBank and Tiger Global, has announced an innovative new salary release product. Current account holders that have their salary paid into their Revolut account will be able to draw down on pay accrued before the actual salary hits the account.
For example, a Revolut current account holder with a regular £2000 net salary paid monthly would be eligible to access £1000 of that from the midway point of the month. Doing so will only cost a £1.50 transaction fee with the advance then automatically recouped by the bank when the employer pays it into the account.
Salary advance products do not fall under normal credit rules and are currently unregulated in the UK. However, the new scheme could potentially draw the attention of the City watchdog, which has warned in the past salary advance schemes could potentially suck users into a cycle of debt.
Revolut, however, sees the new product as a low-cost alternative to the high interest, short term loans offered by payday lenders. They will argue charging just £1.50 for a salary advance will help prevent account holders from falling into a cycle of debt as a result of avoiding much more expensive interest payments with alternative providers.
Revolut’s long term strategy is to develop a ‘superapp’ offering a broad range of consumer finance products on top of its low cost current account facilities. It applied for a full UK banking license in January.
Sector experts are optimistic they new product will not only prove popular with current users but will help the fintech accelerate its growth rate. Revolut is still a very small fish among the UK’s lenders but unregulated salary advances will allow it to gain market share without being restricted by red tape.
Fintech consultancy 11:FS’s head of client services Adam Davis comments:
“Revolut is not big in lending, except in Eastern Europe, but this is lending they can facilitate with less complexity, from a regulatory perspective.”
The biggest of the new breed of payday lenders that appeared in the wake of the financial crisis, Wonga, collapsed in 2018 but other high-interest short term loan companies have taken their place. Buy-now-pay-later fintech companies like $46 billion-valued Klarna, have also become popular in recent years. They let consumers buy goods like clothes or electronics and split payment over monthly instalments.
Revolut said its new Payday product has been designed to
“remove the financial stress” and “avoids reliance on high-cost credit products such as payday loans”.
How the FCA will respond to the move remains to be seen. It last year warned on salary advance schemes:
“If an employee takes their salary early, it is more likely they will run short towards the end of the next payday, potentially leading to a cycle of repeat advances and escalating fees.”
Like other app-only fintechs, Revolut has successfully built up a growing user base by offering better value services than traditional high street banks for services such as international transfers and currency conversion. However, these are low margin and to reach profitability Revolut will rely on adding new, more profitable, services.