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Home Challanger banks Neobanks Valuations Take a Hit: Revolut and Varo Bank in the Spotlight

Neobanks Valuations Take a Hit: Revolut and Varo Bank in the Spotlight

In recent news, both Revolut and Varo Bank have suffered cuts to their valuations, which could indicate a decrease in investor confidence in neobanks. 

Let’s take a closer look at what’s happening with these two fintech companies and what it means for the industry as a whole.

Revolut’s Auditor Raises Concerns

Revolut, a UK-based neobank, recently filed its long-overdue accounts showing 2021 was its first profitable year after revenues tripled. However, the company’s auditor BDO has cast doubt on some of the information in the report, warning that some of it may be materially misstated.

Additionally, BDO was unable to independently verify about 75% of the bank’s reported revenues.

These concerns have led investor Triplepoint Venture Growth to cut the value of its Revolut stake by 15%, indicating a total valuation drop of $5 billion, according to the Telegraph.

Varo Bank Struggles to Raise Capital

Meanwhile, US-based Varo Bank is reportedly seeking to raise $50 million at a 28% discount to its last valuation, according to Fintech Business Weekly.

This news comes after Varo reported a $236.5 million net loss for last year, despite layoffs.

Its path to profitability also remains unclear.

Three Key Takeaways

These developments highlight three important takeaways for the fintech industry:

  1. Valuations are still sliding: The current economic climate and leaner funding climate have resulted in tumbling valuations for fintech companies. This may force some, like Varo, into downrounds. However, this is not necessarily cause for alarm, as cuts to valuations are also a symptom of weaker markets and may rebound as investor sentiment improves.
  1. Trust issues persist: Neobanks are relatively young, which means they generally do not enjoy the same trust levels as major banks. This leaves challengers more vulnerable to downturns and valuation cuts. Neobanks’ rapid growth also leaves them more susceptible to accounting issues than high street lenders, as evidenced by Revolut’s recent concerns.
  1. Profitability remains a challenge: Neobanks have long struggled with generating profits, with fewer than 5% breaking even according to Simon-Kucher & Partners. Varo’s cost-cutting efforts are an example of challengers trying to remedy this issue. Revolut may be making progress on improving its bottom line, but BDO’s warning has dulled investor confidence. Neobanks that generate profits can insulate themselves from the need to make downrounds and minimize the risk of plummeting valuations.

The Bigger Picture

In the face of these challenges, traditional banks and financial institutions may be better positioned to capitalize on their superior financial security and higher levels of customer trust.

Neobanks can generate profits by cutting costs and focusing on more lucrative revenue streams such as credit cards, lending products, and subscription fees.

If neobanks can successfully do this, they can emerge stronger this year and build trust with customers and investors.

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