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In an intensely competitive UK neobank market, Monzo has largely focused on growth over profitability to pull ahead — and its recently released annual report for the year ended February 2017 sheds further light on this strategy.
Monzo now has 240,000 customers for its prepaid accounts, and since January, it's seen 7% weekly transaction volume growth, and 5% weekly customer base growth — spurred largely by word of mouth recommendations. Revenue also grew from £5,000 ($6,000) in its last fiscal year to £120,000 ($155,000). Meanwhile, pretax losses widened 365% from £1.7 million ($2.2 million) to £7.9 million ($10 million) over the same period, a reflection of the company's current focus on growth. However, the document also indicates that Monzo has a robust plan in place to achieve profitability and ensure sustainability.
Here are the principal points of Monzo's business strategy:
- Generating revenue. Right now, Monzo makes no revenue from its prepaid accounts. However, one of its top priorities for the next six months is to launch its current account, which will feature overdrafts on which Monzo can charge fees. Moreover, the neobank plans to start offering loans in the next few months, enabling it to charge interest. Monzo will be looking to cross-sell these services to its existing account holders, as well as adding new ones.
- Cutting costs. Monzo disclosed that it loses £50 ($65) per customer annually on its prepaid accounts, 40% of which is down to free ATM withdrawals outside the UK and EU. As a result, prepaid card scheme costs ballooned by a massive 2,344% from £111,000 ($143,000) in its last fiscal year to £2.7 million ($3.5 million). Monzo plans to scale back such withdrawals to reduce losses. Remaining losses are attributable to customer support, likely related to having staff on hand 24/7 to answer queries. Monzo said that as it acquires more customers, it will become more cost-efficient to serve them, so its customer acquisition focus seems on target.
- Raising funding. Monzo said it has already raised enough capital to sustain the bank at least for the first 12 months of operations after launching its current accounts, but added that if it keeps growing at its current rate, it may have to raise more money in early 2018, or sooner. It said this round would likely have a crowdfunding element. Monzo's previouscrowdfunding campaigns saw very high demand, so another such round would likely also be successful. Although Monzo is reliant on VC money to some extent, unlike for many of its peers, this isn't its only source of funding — another sign that it's actively diversifying its dependency risk.
Monzo's strategy looks very likely win it a leadership position in the neobank market. Monzo already has a pragmatic plan in place to attain sustainability, so success now largely depends on effectively executing it by bringing in revenue and recouping losses. This, however, will depend less on the company and more on consumers' willingness to use its services. By this metric, Monzo is already primed for success: It has found it easy to acquire customers relative to many of its peers, as its users actively recommend the bank and boost its customer base at a low cost. This trust is likely driven primarily by Monzo's dedication to utmost transparency — as long as it sticks to this principle, it seems to have everything in its favor to become the UK's foremost neobank.
Most fintechs, even the unicorns, aren't profitable. Despite having innovative ideas and live products that are successfully disrupting the financial services industry, these fintechs' business models are increasingly proving to be fundamentally flawed.
Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on fintech profitability that:
- Explains why the profitability question is increasingly being raised.
- Outlines why fintechs in different segments are failing to turn a profit.
- Gives examples of just how large some fintechs' losses are.
- Explores how fintechs are striving to solve the profitability problem.
- Outlines vital considerations for fintechs and their investors.
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Fintech could be bigger than ATMs, PayPal, and Bitcoin combined
Asian fintech hubs are pushing full steam ahead North American fintechs are ahead […]