26 July 2017
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Monzo pays a high price for popularity as losses widen to £6.7 million

05 July 2017  |  16595 views  |  7 monzo card

App-only challenger bank Monzo is looking to move more customers to its forthcoming current account and away from its loss-making pre-paid card service after racking up a pre-tax annual loss of £6.7 million.

In a frank assessment of its priorities and financials, Monzo boss CEO Tom Blomfield says the company has recorded an average of five percent weekly growth in customer numbers and seven percent weekly growth in transaction volumes since January.

"If we continue to grow at this rate, we will hit somewhere between 500,000 and 800,000 accounts by the end of the year," he says. "To continue to offer the level of support we aim for, we will need to significantly expand our team; we’re looking to bring on around 40 new customer operations staff in the next six months."

The rapid growth has come at a cost for the startup bank, which saw losses balloon to £6.7 million for the year ended Febuary 2017, compared to £1.4 million in the comparable period.

"Having built direct connections into Mastercard and Faster Payments, our unit economics will improve dramatically once customers move to the current account," says Blomfield. "The prepaid scheme loses around £50 per active customer per year. Simply by moving to current accounts powered by our own technology, we plan to significantly reduce this amount."

He says the bank has about fifty current accounts live today among staff with a goal of rolling out to all exiting customers in late summer.

Other costs come from customer support and international ATM usage, an issue which dogged European neo-bank N26 in its formative stages, and accounts for 40% of Monzo's losses. Although not explicitly stated, the minority of users driving this cost can expect to see charges introduced for overseas ATM withdrawals in the not-too-distant future.

Blomfield says the bank has enough capital to run for another 12 months, but will likely need to return to the market for further funding into 2018.

In the interim, the search goes on for a revenue-generating model. To this end, the bank is exploring different ways of introducing a lending component to to its suite of services.

"We will focus on offering lending tools to to help people manage their day-to-day finances more effectively," says Blomfield. "We want to give people immediate visibility and control of their money, rather than tempting them in with a low headline price and then recouping costs elsewhere.

As a result, we will aim to run a number of quick, small-scale lending trials to better understand how people like to manage their money. When we’re confident these new product features work well for customers, we’ll roll them out more widely."
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Comments: (7)

A Finextra member
A Finextra member | 05 July, 2017, 11:08

It's virtually impossible to make money on current accounts due to the way the UK market is set up (free in credit current accounts), especially if you give away for free things like overseas ATM withdrawals which cost a lot of money...the neobanks need to quickly move to other streams of revenue - the best support and the nicest user experience is no good if you can't turn a profit!

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Kristian T. Sørensen
Kristian T. Sørensen - Norfico - Copenhagen K | 05 July, 2017, 11:17

While I sincerely wish Monzo and all (well most) of the other challenger and neo banks the very best, the article really highlights the biggest challenge for the challengers - the search for revenue. As the previous commenter pointed out, it is next to impossible to make money offering current accounts and basic payment services - not only in the UK, but across all of Europe. I could fear that these banks end up like the MVNOs of the telco industry. They serve a purpose of challenging services and prices of the incumbents, but the minute they start to pose any real threat they will be bought by the very incumbents they set out to challenge. To be a real disrupter in banking, you also need to disrupt the fundamental business model - and we have yet to see a good and viable solution for that. 

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Hector Gonzalez
Hector Gonzalez - Avaloq - Edinburgh | 05 July, 2017, 13:47

Totally agree with the previous comments.

I really like Monzo and their focus on user experience, but it is not very clear to me how they are going to survive once funding starts drying up.

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A Finextra member
A Finextra member | 05 July, 2017, 16:57

I'm not sure that this profile of expenditure and costs before turning a profit is any different from any new startup. Whether this is a "high price" is open to debate but we shouldn't forget that Monzo is building a new core banking system that is truly digital while growing a loyal customer base.

Yes the test will be whether it can produce a profitable business model but to suggest that it is next to impossible to make money with current accounts ignores the fact that a model without branches and lots of staff is quite different to the models of the legacy banks. Monzo will be lending too so it's far too early I think to be pessimistic.

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Alex Letts
Alex Letts - U - Sheffield | 06 July, 2017, 05:39 If you want to operate successfully in this market, you will need to charge fairly and transparently for what people use. Regulation and open banking will make current account costs and cross subsidisation more and more difficult. People will pay but only for a significantly enhanced product experience, differentiated from the increasingly underfunded products offered by incumbents.
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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 06 July, 2017, 16:20

Oh have we already forgotten how Monzo freezes current accounts?

https://www.finextra.com/news/fullstory.aspx?newsitemid=30686

When frozen, current accounts can provide a free source of funds to lend at a profit. Hope this is not the kind of devious trick that I'd alluded to in my comment on the previous post. Let's see.

On a side note, a loss of £6.7 million is not even peanuts for an average VC-funded fintech. Not sure why Monzo is compelled to pivot after making such a puny loss.

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Dirk Kinvig
Dirk Kinvig - Finextra - London | 07 July, 2017, 11:36

So, does it look like the business model of some other challenger banks i.e. Atom, to concentrate on Savings accounts & mortgages then lending money to SMEs, while not sexy, is more sustainable and therefore the right approach to take?

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