Revolut endured a significant blow as fraudsters exploited a loophole in their payment system, stealing $20 million in the process. This incident, previously unpublicised, is likely to intensify the scrutiny around the company, which is already reeling from a host of senior-level resignations and a conditional audit report by BDO.
The Loophole in Revolut’s Payment System
A mismatch between the US and European payment systems was at the root of the issue. Revolut was unintentionally refunding its own money when transactions were declined, as shared by insiders familiar with the matter. While they managed to recover some funds, it still ended up losing $20 million, two-thirds of its 2021 profit.
The fault initially emerged sporadically towards the end of 2021. Early in 2022, criminal syndicates exploited an error by encouraging people to engage in high-value transactions that banks would inevitably decline. They then actively withdrew the declined transactions from ATMs. Subsequently, they withdrew these declined transactions from ATMs. They then withdrew these declined transactions from ATMs. This scam primarily drained Revolut’s corporate funds, leaving customer accounts unaffected. The fraudulent activity went totally undetected by Revolut’s systems.
Revolut Scam Discovery and Response
The scam came to light when a partner bank in the US alerted Revolut to a discrepancy in its cash reserves, leading to substantial cash infusion requests from its US subsidiary. Revolut acted swiftly, sealing the loophole by spring 2022. Nevertheless, the company remains tight-lipped and has yet to include the losses in its belated 2021 financial results.
Revolut chose not to publicly acknowledge the incident, which observers could view as a strategic decision.. As a major player in the fintech industry, it’s crucial for Revolut to maintain the trust and confidence of its customers, shareholders, and potential investors. Admitting such a considerable financial loss, especially one due to a system vulnerability, could tarnish its reputation and erode that trust.
Furthermore, as Revolut’s customers in the UK have frequently been the target of scams, publicising such a large-scale fraud could exacerbate the situation. The amplified scrutiny might further deter potential customers, adding a new layer of complexity to Revolut’s ongoing challenges.
Licensing and Audit Challenges
Revolut is still awaiting its UK banking licence, over two years after its initial application. This wait is much longer than the standard processing time of less than a year. The UK’s Financial Conduct Authority mandated an independent review of Revolut’s policies regarding the prevention and detection of financial crimes in 2020.
BDO, an audit firm, issued a warning that Revolut may have “materially misstated” a significant portion of its 2021 revenues. They expressed concerns about the “completeness and occurrence” of around two-thirds of its reported revenues for that year.
Executive Departures and Falling Valuation
Revolut has also weathered several high-profile departures recently. Among those leaving are James Radford, CEO of its UK bank, and Mikko Salovaara, the chief financial officer. Joel Kass, who held positions as the chief of staff and head of banking products for the UK entity, is also set to depart.
The fintech giant’s valuation has seen a significant decline. With venture capital firm Molten Ventures and asset manager Schroders reducing the valuation of their stakes. An external evaluation in July 2021 valued Revolut at $33bn, establishing it as the UK’s most valuable private tech group until Checkout.com surpassed it with a valuation of $40bn in January 2022.
Revolut’s pursuit of a UK banking license could also be jeopardised by these revelations. The UK banking license process involves a comprehensive review of a company’s operations, including its risk management and fraud prevention measures. This recent incident could raise red flags, prompting regulators to question Revolut’s readiness for such a license.
