Start-up takes aim at PayPal, raises $4.8M

A start-up that lets vacationers spend money abroad at market foreign exchange rates has raised $4.8 million in funding.

Balderton Capital, Seedcamp, Point Nine, Venrex and Index Ventures have invested in London-based Revolut. Between them, these venture capital firms have backed companies from Facebook to Citymapper.

Seven-month-old Revolut allows users to set up an account and transfer money from their domestic bank account into it. Customers can then use Revolut's MasterCard to spend these funds abroad at the so-called interbank exchange rate.

Usually consumers buy currencies from exchanges that sell them below the interbank rate in order to make a profit from the transaction. But rather than using the exchange rate, Revolut is looking at other revenue streams.

"At the moment our vision is to become a payments platform between customer and merchant and allow them to make instant payments, low cost payments, and build a marketing platform to allow merchants to directly advertise to merchants," Nikolay Storonsky, chief executive and founder of Revolut, told CNBC by phone.

Revolut

Storonsky said that the start-up is building a platform that would allow brands to give Revolut's users direct promotions and special offers. In this way, Revolut could charge brands for the service.

London has been a hotbed for financial technology or fintech start-ups and Revolut is playing in a competitive space. One London-based company Transferwise for example allows people to transfer money from a bank account in one country to another with low fees. WorldRemit focusses on speedy and cheap remittances. Where Revolut hopes to be different is the ability for users to spend their own money from a domestic bank account in foreign currency when abroad.

But it will need to convince merchants to ditch established companies like PayPal, as well as get a large scale in order to make their revenue streams profitable. The start-up currently has over 100,000 users and claims to have transacted $200 million since July 2015 when it was founded.

Storonsky said that the funding will also be used to boost the company's headcount from 24 people currently to around 40 or 50 by the end of the year.

Currently users can top up their Revolut account with British pounds, euros or U.S. dollars. Customers can spend in 90 currencies however and send money in 23 currencies. Storonsky is going to use some of the funding to add more currencies to the platform.

The founder sees his company being able to also challenge PayPal in business payments space. PayPal facilitates transactions on a merchant's website and part of that includes foreign exchange too. But Storonsky said PayPal's fees are too high.

"So if you look at PayPal it is purely an e-commerce model and they charge a merchant but they are very expensive. If you look at all the fees for merchants to accept international money it is ridiculous," Storonsky said.

On PayPal, a European seller can pay around 5.2 percent per transaction plus a fixed fee on top of that, for a cross-border sale, according to PayPal's website.

Storonsky also said his team is also looking to build a borrowing feature by partnering with credit providers. An investor in the company said that the large potential market attracted them to invest, even before the product was launched.

"Nikolay and the Revolut team have created an elegant app that is built on top of incredible technology. When you couple this with the global market opportunity that Revolut are chasing, the potential is huge. We invested pre-launch, and have been very pleased with the progress that we've seen," Daniel Waterhouse, general partner at Balderton Capital, told CNBC by email.