Britain’s digital banks: profitable or just popular?

US-FINTECH-PROFITS
A Monzo card in an undated photo. Courtesy Monzo/via Reuters

December 29, 2017

By Emma Rumney

LONDON (Reuters) – British app-based bank Monzo and others like it want to make money by allowing other firms access to their customers rather than lending to them, but this is an untested path to profitability.

Monzo’s user numbers soared by 300 percent to 450,000 in nine months this year, which has attracted investors and more than doubled its valuation to $336 million.

The bank’s distinctive coral-coloured card has become commonplace in the wallets of the young and tech savvy.

But this growth has come at a cost: until recently every customer meant a loss of 50 pounds ($67) as Monzo offered services such as overseas cash withdrawals for free.

“The more you grow, the more you lose and you have to turn that corner at some point,” CEO Tom Blomfield told Reuters, referring to the moment when each customer is no longer a loss to the bank. However he has no target for overall profitability at Monzo.

Monzo and competitors like Starling Bank still largely steer clear of the loans and hefty fees for overdrafts or foreign exchange that have been so lucrative for existing banks, but which the newcomers see as ripping off consumers.

Absorbing such costs has been expensive for some of the upstarts, but they think they can make money from a new model based on using customers’ data to push them towards other financial services, taking a commission whenever it works.

If successful, they could eat into the retail banking profits of the big banks just as new rules are being introduced to reduce their dominance, and returns are being shredded by tougher regulation and growing competition.

They see the big banks’ approach, built around lending out customers’ deposits at higher rates of interest, as costly. Capital requirements are high, which would affect the way investors looked at the newcomers if they took that route.

“Your business tends to get valued like a bank and not like Google,” said Blomfield.

(For graphic on Digital banks’ rise, click http://tmsnrt.rs/2BdERcZ)

THE ‘MARKETPLACE’

The digital-only banks boast slick apps, which can analyze spending in real time, send budgeting nudges and allow users to freeze and unfreeze their card at the click of a button.

Aurelie Gonnage, a 25-year-old advertising producer, uses her Monzo account to budget, pay friends easily and spend abroad without large fees.

“I love the instantaneity of it,” she said, although she wouldn’t use it as her main bank because it pays no interest on deposits and has no branches to visit in an emergency.

But for the new banks, becoming central to users’ lives is the key to accessing the wealth of data needed to nudge them toward the right products, and making money in the process.

“The important place in people’s financial lives is where the data is,” said Starling Bank CEO Anne Boden.

Partner firms plug into the apps, creating a “marketplace” of services ranging from loans and investments to insurance and energy, and paying the banks a fee whenever a customer signs up to their offering.

The banks will rely on this for income to varying degrees.

Boden said it will account for around a third of revenues at Starling, while Monzo’s Blomfield expects it to be the bank’s main source of income in the long term.

“The difficulty is you need massive scale and access to data to really make it work,” he said.

Achieving that could be difficult as others pursue similar strategies, said John Cronin, head of UK banks research at analyst firm Goodbody.

Virgin Money <VM.L> also has plans for a marketplace, and HSBC is piloting a money management app. Other big players are expected to follow suit in response to new regulations forcing them to share their customer data with potential competitors.

GROWING PAINS

The new banks’ branchless, digital proposition means they benefit from far lower costs.

Nevertheless, digital player Revolut, with a 300 million pound valuation and 1.2 million users, believes it couldn’t achieve the scale it wants with marketplace money alone.

Subscriptions for premium and business accounts resulted in 2.36 million pounds of turnover in 2016 and Revolut plans to offer overdrafts and loans too. It expects to break even by the end of 2018.

Starling plans to hit the same milestone one year later. Interest from overdrafts will provide a third of its income, said Boden, with more funds coming from a business-facing payments service and upcoming business accounts.

Monzo is also currently rolling out overdrafts and exploring one lending product.

Edward Firth, managing director, UK banks at analysts KBW, said big banks make such a good return on retail banking that the digital upstarts can halve it and still make enough profit.

He has more confidence in models where the marketplace supplements such income, rather than the other way around.

“It’s still untested,” he said.

Eileen Burbidge, partner at venture capital firm Passion Capital, which backs Monzo, said the bank’s rapid growth validates her confidence in its ethos and model.

“That kind of engagement or interest from consumers is really unheard of in financial services,” she said.

Still, the firm wants Monzo to prove that each customer can drive more revenue than they drive cost within a year or so.

Monzo has already halved the cost per user, although that has meant cutting back on some key offers: previously unlimited overseas ATM withdrawals cost it 16 pounds per customer.

Now it will start adding revenues. Blomfield sees the marketplace playing an increasingly important role, although he added: “Until it plays out it’s hard to know for sure.”

(Reporting by Emma Rumney; editing by Giles Elgood)

  • Harold Swift

    Just keep blowing…. All I know is all these harebrained ideas that come from the 1 percent wind up putting all the little peoples cash in their pockets. Ponzi’s and scams have been around since the beginning of time and this one is unique, complex and will do the same as the rest in the bitter end.

  • Harold Swift

    Digital banks may be profitable and popular but they are squirrely and are certainly on thin ice. No gold, No foundation. No collateral such as long term deposits of any kind, no common sense. Anybody who thinks they can deal with free money very long is nuts.

  • A marcus Young

    It sounds like a scam to me.

    • Harold Swift

      That my friend is the best and simplest way to label it.

  • landy fincannon

    The world is marching headlong into a cashless society.

    • Harold Swift

      No… ONE HUGE CRASH.

      • landy fincannon

        Yes, then the microchip.

  • All American

    So happy that we broke away from this very messed up country!!
    God Bless America 🇺🇸And all of Her Patriots🇺🇸

  • intimeforthedime

    Bitcoin and Alt-coins are the REAL digital banks.
    Know how much it costs to make an overseas transaction or any transaction with Alt-coins?
    $0
    Know how long the transaction takes?
    10 minutes at the longest
    Know how secure the transaction is?
    Better than any bank on Earth right now
    Know how many governments or “Tax men” know anything about that transaction, or can find any information about it? To tax you for the transaction…
    NONE

    This article is about the same fee hiding slow transaction structure of EVERY bank on EARTH right now.
    They give you a card, letting you pay your bills “on the line”, and then charging you for it. As if the digital money costs anything to move around.
    But they do have to pay their employees and increase profits…with your money.

    And invest your money for a few days while you “wait” for the transaction to clear.

    Alt-coins are about to rip the banking industry a new ace hole just like mp3s did to the music industry.

    • gospursgo

      MP3s Suck!

      • intimeforthedime

        They did not back in 1997, oh I’m sorry, you probably learned about them in 2002 when Apple released the iPod to the world.
        While the “geek” world was using them since 1997.

        • gospursgo

          You assume way too much. Compressed audio sucks. CDs are at the minimum quality level.

          • intimeforthedime

            Like that matters. And radio is at what level, but is listened to by more people than you have seen in your life. I don’t see millions of people going out and buying the most perfect sounding audio system for $$$$$$. People could care less about “the perfect audio quality”.
            I do see them saying, “MP3s sound just as good as “whatever”, so I’m good with that.” And BAAMMM, 99 cents later they are listening to their song.

            If you like perfect sound, then stick with it.
            My point was, the technology is here, you either get with it or keep fighting it like you obviously did with the MP3s. I bet the rest of the world will get with it.

          • gospursgo

            Don’t care what other people do or think or want to listen to. It is my ears I’m worried about. I’m an old musician and retired audio engineer. MP3 still suck.

    • S Mol

      If they’re so secure, how is North Korea able to steal them by hacking?

      • intimeforthedime

        The Alt-coin or “block chain” was not hacked. What was hacked is the actual exchange (bank) that people used to interact with the block chain. Most people who are buying selling bitcoins are doing so through exchanges. These exchanges are centralized, in one location and keep your bitcoins in their “wallets” for you. Which is ripe for hacking.
        If you keep your currency in the Alt-coin currency, basically you do not “cash out” to a fiat currency like USD then no one can hack your account. Why? Because your account is in the Block Chain. Getting verified and synced on millions of computers every 10 minutes (for bitcoin). Unless of course you are like 50% of the online world that shares their account details (private Key) with others and then complains (acts surprised) when their account gets hacked by “others” (the people they shared their key with like a dumb ace).

        You will here of tons of “hacks” until people realize this is NOT an investment tool, this is NOT a buy now with USD, then sell later for more USD tool. This is a real currency, and once you have your money in it…then it is secure, you spend it, you do NOT cash out.
        But alas, there will be many people who continue to look at it only as a tool to invest in, these people will have to use exchanges, and these people will be “surprised” when the exchanges get targeted for hacking.

        • Harold Swift

          All I know is all these harebrained ideas that come from the 1 percent wind up putting all the little peoples cash in their pockets. Ponzi’s and scams have been around since the beginning of time and this one is unique, complex and will do the same as the rest in the bitter end.

    • landy fincannon

      Precursor to a cashless society. Prophetic?

    • Harold Swift

      No cash base, no regulation, nobody responsible for anything? No.

      • intimeforthedime

        The responsible party is you. When you look in the mirror you are looking at the ONLY person who truly cares about you and what is best for you.
        Sure you can lie to yourself and say you have loved ones that truly care for you, and they do…only to a point. I really doubt a third party bank will ever give a rats ace about what is best for you…unless of course it aligns with making them money.

        No need for a third party to be responsible for you. You don’t like the transaction or “trust” you are not getting what you want out of the transaction, then don’t do it.
        That is Bitcoin or the alt-currencies.