10 years ago, Lehman Brothers collapsed, what has changed?

This Saturday marks 10 years since the Lehman Brothers collapse and the global financial crisis started. Revolut’s CEO, Nik Storonsky, spent 10 years as a trader at leading investment banks including Lehman Brothers. He was a witness of catastrophic problems in banking at that time. It gave him huge motivation to launch Revolut in July 2015. He simply wanted to try building financial services company from scratch, in a different, better way.

Fast forward three years, and Revolut is Europe’s fastest growing fintech unicorn, opening thousands of new accounts each day with over 2.5 million customers across Europe. However, the initial impulse was collapse of Lehman Brothers with all the wrong things it represented and the crisis when new fintech companies were born.

Nik still remembers a lot and has some interesting stories from that time at Lehman. Since Revolut has officially launched in Malta, we thought that it would be super interesting to present some of these stories to you and see how this major crisis led to a new FinTech era that would revolutionize banking once and for all.

What was your role at Lehman? How long were you there?

I was an Equity Derivatives Trader at Lehman for 2 years, from 2006-2008.

Did you have any inkling that the business model was going to break (specifically around the reliance on short-term funding)?

Not at all, it was big and powerful investment bank, so the announcement came as a shock (like a lot of people) as we were told without much warning.

Was the securitisation business model well understood across the bank?

Yes, it was.

When did you start to feel the tremors/realise that something big was happening?

When the Lehman Brothers stock price dropped to zero for a second – we thought there was a glitch on the Bloomberg Terminal. It instantly came back to 20 dollars. However, it was a bad sign – in 2 weeks time it hit zero again due to the bankruptcy announcement.

At what point did it become clear the bank was going down?

Only at announcement time – no one believed it would be bankrupt. For the next month we were looking for new jobs and there were rumours of Nomura acquiring the franchise.

What are your recollections from the week the bank went down?

We were coming to the office with absolutely nothing to do, which was surreal. None of the trading screens were on. You’d look around the office and everyone would be playing the only online game that wasn’t blocked – which involved shooting down helicopters. It became a bit of a competition to stave away the boredom.

What happened in the aftermath?

I was lucky because I was never really out of job. Nomura bought my division and simultaneously I got an offer from Credit Suisse, which I took. I was turning up to the office on time everyday, the same as most people. However, you could see people from other divisions boxing up their stuff to leave, and people with no work to do. Those whose jobs were uncertain or gone were pretty stressed, we were just lucky that our team had some job security.  

Were you aware at the time how massive a moment it was?

At the time, I couldn’t really comprehend the effect it would have. I had only recently graduated and was in a job that I enjoyed.

When did the Revolut thoughts start, and can you connect them directly to Lehman or was it something else that triggered it?

I saw first-hand that Lehman were able to use technology that was so much better compared to other banks, but unfortunately for them they were not adequately capitalised. They taught me the fundamental skills that I believe have got me to where I am today. Starting anything new is extremely hard and you really need to have character, mindset and the brains to break the walls, which was definitely instilled in us at Lehman.

Many of Lehman Brothers’ top employees who left in the aftermath of its collapse decided to start their own businesses. A generation of entrepreneurs rose from the ashes, but were pretty disillusioned with the financial system. As I mentioned, I was one of the lucky ones. Nomura bought our division, but I ended up taking an offer from Credit Suisse, where I eventually met Vlad Yatsenko, Revolut’s co-founder and CTO. We were both frustrated with the fees charged to send money abroad and launched Revolut in July 2015 as a way to rebuild the industry from the ground up using technology. Fast forward three years, and Revolut is Europe’s fastest growing fintech unicorn, opening 7,000 new accounts each day with over 2.5 million customers across Europe.

Did you notice some of the cracks in Lehman during your time there? Any particular practices or events that happened during your time there, or that you noticed generally, that either didn’t sit right?
Not at all, it was big and powerful investment bank, so the announcement came as a shock (as it did to a lot of other people). We were told without much warning and it seemed to happen quite quickly. At the time, I couldn’t really comprehend the effect it would have. I had only recently graduated and been in the job for a couple of years, so there wasn’t anything I saw that noticed.

What do you think about the changing landscape of banking since? Banks in the continent for instance have been forced to shed a huge amount of bad loans, review their models, i.e. the investment banking model, propel themselves into the digital age. Do you think they’ve done enough?
New financial rules don’t allow excessive leverage to banks, so we are much better protected from such incidents happening again. Significant changes to the regulatory system have helped, alongside banks bolstering their capital buffers since the financial crisis.

Would businesses like yours have come about if it weren’t for the 07/08 crisis?
Many of Lehman Brothers’ top employees who left in the aftermath of its collapse decided to start their own businesses. A number of successful entrepreneurs rose from the ashes who were pretty disillusioned with the financial system. As I mentioned, I was one of the lucky ones. Nomura bought our division, but I ended up taking an offer from Credit Suisse, where I eventually met Vlad Yatsenko, Revolut’s co-founder and CTO. We were both frustrated with the fees charged to send money abroad, and many people didn’t trust the traditional banks, so we launched Revolut in July 2015 as a way to rebuild the industry from the ground up, with a focus on technology. Fast forward three years, and Revolut is Europe’s fastest growing fintech unicorn, opening 7,000 new accounts each day with over 2.5 million customers across Europe.

I saw first-hand that Lehman were able to use technology that was so much better compared to other banks, but unfortunately for them they were not adequately capitalised. Lehman taught me the fundamental skills that I believe have got me to where I am today. Starting anything new is extremely hard and you really need to have character, mindset and the brains to break the walls, which was definitely instilled in us there.

Do you think startups will ever get over the hurdle of trust? It is arguable that – despite the fact that banks have trust issues of their own – they are still the respected names in the business and likely have a hold over consumers.
Yes, I think that people are starting to trust startups more, but I’d say that the trust in banks is not that strong. Recent scandals that undermined the biggest names, and I think we’re beginning to see start-ups earn the trust of consumers. It’s overwhelmingly important for fintechs to invest in building trust, through transparency, honesty, collaboration and providing the best customer experience. Credibility is important when you want to win the trust of a new customer, but the most important thing is maintaining that credibility through a transparent brand that delivers an incredible service.

Do you think there might be too many startup digital banks/e-money firms in the market right now? Will there ever be a time when it’s time to start thinking about consolidation/mergers? That’s a question that is in fact facing a lot of Europe’s big banks right now.
We believe that increased competition should be treated as an opportunity. As long as there is innovation, there is room for more players in the space. If mobile banking services continue to create new products or utilise new technology, we’ll be able to offer a more competitive marketplace and provide better customer experiences for mobile banking users. We also believe that competition in the mobile banking space prevents complacency. If companies are constantly trying to create better financial products for their customers, we’ll improve the financial services industry as a whole.

Many of the largest banks have too much internal complexity to compete with fast and nimble startups and digital-only banks. To adapt, we expect them to consolidate and acquire promising startups. We expect big tech companies to be more agile than traditional banks to start investing in promising technology platforms and start-ups, with an increasing number of key partnerships, mergers and acquisitions.

What would you say are the main problems in the banking sector today? Any “ticking bombs”, that could implode the way LB did?

New financial rules do not allow excessive leverage to banks, so there is less risk and we are much better protected from such incidents happening again. I don’t think there are any current ticking bombs, but who knows what could happen in the after the next 5-10 years.