Monzo is a truly unusual thing—a bank young people are excited about. But while its speed and ease of use are impressive, there is a problem—it’s not making money
A letter from the bank tends to arouse dread. In these mostly paperless days, it usually means you’ve gone overdrawn again or the interest rate on your savings account has moved even closer to zero. Best not open it now; stick it on the pile for later-slash-never. But when my new Monzo bank card landed on the doormat one morning, I felt a frisson of excitement. Perhaps it was the six-week waiting list: there were 66,000 people ahead of me in the queue when I applied. Maybe it was just the hot pink debit card, the millennial’s answer to the black Amex.
Monzo, a smartphone-only “challenger” bank, has this effect on a lot of people. In its first round of crowdfunding, in March 2016, it raised £1m in 96 seconds, the fastest crowdfunding campaign ever. In a more recent campaign, the singer Tom Odell and Kevin Systrom, co-founder of Instagram, came on board as investors and the company raised £70m. Wired magazine asked if Tom Blomfield, Monzo’s 32-year-old British founder and chief executive, would become “the Jeff Bezos or Mark Zuckerberg of banking”.
It’s not easy to say why Monzo inspires such passion. Unlike many banks, the startup does not offer you a cash incentive to join. (Instead it gives customers one “golden ticket”, which they can pass on to a friend to jump the queue to join; these do brisk business on eBay.) Furthermore, you don’t receive interest on the money you keep with it. Monzo offers attractive savings on spending abroad, but it’s hard to believe that this alone has brought in almost half a million UK customers, who have spent more than £800m, since it was launched in 2015.
“There’s a group of very rational people who know about it, but don’t get it,” Blomfield concedes, over a coffee in Monzo’s office, just off the Old Street roundabout in east London. If the Monzo story ever gets the Social Network treatment, Ryan Gosling would be a shoo-in for the Blomfield role. “Typically bankers, accountants, lawyers or sometimes investors, they say, ‘Why do people like this? Why are you growing so fast? What’s the benefit?’ And when they say what’s the benefit, they mean the benefit for a purely economically rational person: ‘What do I get?’”
Monzo believes it can restyle banking for the digital age. Its strapline is: “We’re building the kind of bank that you’d be proud to call your own.” It uses a lot of emojis in its communications. Along with other app-based challenger banks, such as Starling and Atom, it thinks it can offer a different, more intuitive and personal experience than the five big banks – Lloyds, Barclays, HSBC, the UK arm of Santander and Royal Bank of Scotland – that dominate more than 80% of the current-account market in the UK.
So far, Monzo has made a particularly effective landgrab in the youth sector. Half of its users are under 30, and a further quarter are under 40. It started out offering a prepaid debit card that updated purchases instantly and sorted them into helpful categories (eating out, groceries, transport and so on) on the app on your smartphone. In recent months, it has begun to switch customers over to a full-blown current account.
“Monzo can’t be for everyone, but I think it’s for about 90% of people,” says Blomfield. “It’s for people who live their life on their mobile phone, that’s the primary unifying factor. So if you really really are glued to this thing” – he holds up an iPhone – “then it’s an app that’s designed in the same way that WhatsApp, Citymapper, Uber and Amazon are. It just works the way they expect. And it gives you real-time visibility and control. It’s one of those home-screen apps: you have five or six apps you use to live your life and Monzo is one of those things.”
Not long ago, Blomfield claimed that if Monzo kept growing at the same rate it would have a billion customers by 2023. Today, he backtracks, but only a couple of steps. “This is a 20-year project,” he clarifies, “but a billion users, yes, that is our mission.”
The exact form it will take is up for grabs; Blomfield wants to keep Monzo fluid. “What we’re trying to build is a web platform. Something like a Facebook or a Google, almost an Amazon even or a Twitter. A marketplace bank, where we don’t offer all of the products to our customers but we are the interface between them and their money. So they use Monzo to visualise and control their money wherever it sits, and that might be in a Barclays savings account or their HSBC mortgage or their pension or their Isas or whatever. So all the products aren’t necessarily provided by us. In fact, most of them are not.”
Banking has, historically, changed at a pace just a little faster than glacial. The big banks all offer a very similar range of products and dominate the financial landscape. Overwhelmingly, we open a current account with one of them as children or young adults and that becomes our bank, often for the rest of our lives. Before a switching service was introduced in 2013, on average we would stay with our bank for 17 years. The typical marriage in Britain, meanwhile, lasted 11 years, seven months.
This situation, however, is set to receive a shake-up. From 13 January 2018, open banking will force the UK’s nine largest banks to share their data with licensed startups (subject to the approval of account holders). One simple benefit of this change is that, at last, we will be able to coordinate transactions from different banks in one place, such as a Monzo app. More intriguing, though, is what use can be made of the data; in theory, putting aside obvious privacy concerns, it should lead to a personalised bundle of services and products. Maybe it will automatically switch your gas and electricity to ensure you’re always on the best rate.
Open banking has been called “the Uber moment” for the finance industry by Antony Jenkins, the former chief executive of Barclays who now runs 10x, a financial services data firm. And the assumption is that the banks will be unable to keep pace with the fleet-footed startups.
Blomfield admits that he has basically no banking experience and he mostly employs people who haven’t worked in the field either: “We really value naivety, being able to approach a problem from first principles.” His early years were spent in Hong Kong and Singapore, where his father was a civil engineer. He went to a grammar school in the home counties and then studied law at Oxford. After graduating, he slipped into management consulting: “The career for people who don’t know what they want to do with their career.” He has since set up and worked on a bunch of startups – and had a six-month spell at Monzo’s competitor Starling, which he can’t talk about for legal reasons – but settled on Monzo because he believes it can be “a world-changing company”.
Open banking, Blomfield insists, will spark a revolution, but its impact will not be felt immediately. He cites the adage coined by the American futurist Roy Amara: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
“With open banking, people are expecting a tidal wave of something,” says Blomfield. “I think it won’t happen in January next year, but the concept behind it has the potential to revolutionise retail finance totally. There is just so much valuable data sitting in these bank accounts. I don’t think banks are doing it malevolently, they are not using it for nefarious purposes, they are just incompetent. They just can’t get it out. And if consumers are able to unlock that data and use it for their own benefit it will create entire new industries.”
Martin Lewis, the journalist who created moneysavingexpert.com, agrees that we should prepare for disruption, but he is wary of writing off the major banks just yet. “The game is changing and Monzo is at the forefront of it, but I wouldn’t necessarily say it’s a huge outlier with everything else that’s going on,” he says. “Monzo is an app-based bank that is doing it well. But Monzo has neither invented the app, nor has it invented the bank. It would be stretching it to say it’s going to be an Amazon; to be honest it’s stretching it even to say that it might become a Nationwide. It would be lucky to be on the Nationwide scale.”
This is not “a slag”, Lewis explains. Nationwide has an enormous customer base and billions of pounds under management. But Lewis takes a different view from Blomfield on why people are reluctant to change their bank. “A lot of people actually – and we know this from surveying – are pretty happy with their bank account,” he says. “It’s a bit like changing your computer or changing your operating system. That’s a big deal, it’s a hassle and I think some of the inertia is due to relative customer satisfaction. And that’s difficult to get over.”
Monzo has certainly had some growing pains in its short life. In October, it announced that it would cap overseas ATM withdrawals from 18 December: £200 a month will be fee-free, but further withdrawals will incur a 3% charge (spending by card abroad in shops, hotels and so on will remain free of charge). The problem, Blomfield says, is that it started out costing about £6 per customer – which Monzo swallowed – but it became so popular with a small number of users that the bank was paying an average of £17 per customer per year.
“The way we address those things is just through radical transparency,” says Blomfield. “We lay out exactly what the ATMs are costing us and how the usage has changed and people can really look under the covers and go, ‘Oh, OK, here’s a problem and that’s a solution.’”
Then there was the small matter of the £7.9m pre-tax annual loss that Monzo announced for the financial year ending in February. “The losses this year will be much, much higher,” says Blomfield, smiling. “I don’t say that with any glee, but it’s very weird how, especially the tech press, in almost a single breath will report the great news of a funding round and then the devastating news of a loss.
“We have just raised £70m,” he goes on, “that will give you an indication of the size of the losses over a year or two. We wouldn’t raise that much money if we weren’t going to lose it.”
There’s a quiet confidence to Blomfield; he describes himself as “highly caffeinated, very, very direct and driven”. But there are no guarantees. “The investors who have put their money in Monzo know that they’re taking a big risk for an outsized return,” he says. “Our valuation went up two and a half times in 12 months. So if you invested in January, your investment is now worth approximately two and a half times what it was in 12 months. That is not risk-free, clearly. We hope it will multiply in value over the next few years, potentially many, many times in value…”
He pauses. “But there’s a really big chance you’ll lose everything.”
Eight more finance apps
Enables you to set up an Isa from your phone in just a few minutes. There are various options for determining your monthly deposit, but the most unique is that the app will round up any purchases made from your linked bank account to the nearest pound and deposit the difference in your Isa. You can also select the level of risk to which you would like to expose your investment.
Another saving app. Once linked to your bank account, the app’s algorithm will learn how much you can afford to save each month. Your initial interest rate is 0%; this increases by a percentage point for each person you refer who also signs up (to a maximum of five).
Do you have a wallet stuffed with plastic? This service enables you to merge them all into one Curve card, then select which account to debit from your smartphone on a use-by-use basis. Features low fees on overseas transactions and also allows business users to sync with accounting app Xero.
Like Chip, this app employs an algorithm to learn how much you can save. It invests your money in RateSetter, a peer-to-peer lender. The nature of peer-to-peer lending means the interest you receive may vary from the average rate of 3%. Communication with the service is conducted through Facebook Messenger.
Offers a full-featured mobile-only current account with overdrafts, direct debits and so on. Additional features include zero ATM fees abroad, the ability to analyse your spending by sector (eating out, for instance) or merchant (Pret a Manger), and the option to create “goals” to save for a specific purpose. Protected by the Financial Services Compensation Scheme’s £85,000 savings guarantee.
Currently in beta stage, this app and website describes itself as “your money platform” – you can feed in data from all your various accounts, cards and investments to keep track of them in one place. The app will then make suggestions for financial products and services it thinks will interest you.
Currently a Mastercard only available to the startup’s 11,000 “founders”. But Tandem recently acquired Harrods Bank and, if the deal is confirmed by the banking authorities, it will gain a licence to offer current accounts to all. Tandem also plans to offer account aggregation and money-saving recommendations generated by algorithms.
n 2015, Atom was the first digital-only bank to be granted a licence by the Bank of England. Offers savings accounts and mortgages through brokers, has plans to offer current accounts in 2018.
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Lead Image: Big plans: Tom Blomfield, co-founder and chief executive of Monzo. Photograph: Monzo