Monzo Bank Ltd, popularly known as Monzo is a new bank based in the United Kingdom headquartered in London. A neo-bank is a purely digital bank or virtual bank that doesn’t have any physical branches. All the services related to accounts, payments, and credits are provided online, mostly via a website or mobile app.
Thus Monzo is a newer version of old-fashioned banks serving the tech-savvy customers with all comfort and exclusive services related to banking. Curious to know a little more about the neo-bank Monzo? Then let’s jump into it right away. Let us also discuss its business model and understand how it makes money. So, shall we?
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What is Monzo?
Monzo is a purely digital bank based in the UK that operates through a mobile app. It was one of the earliest app-based banks in the United Kingdom.
Monzo has been serving its customers through a mobile app since September 2016. Along with the app, the company also issues Monzo cards (the same as PayPal) for its customers to make online and offline transactions. The company offers all the services a physical bank offers but the only difference is it doesn’t operate in any physical branch.
The company has over 4 million customers as of March 2020 and it posted £67.2 million in 2020. The company showed a net loss of £113.8 million in July 2020 financial results. The loss was huge when compared to the £47.1 million loss in the previous year. However, as of 2019, Monzo was the 125th largest bank in the UK and holds a local market share of 0.01%. Whereas Starling, Monzo’s one of the key competitors holds a 2.6% share in the UK’s banking market. However, Monzo’s banking app is the most popular fintech product and occupies 50% of the market.
Short History of Monzo
Monzo has founded in 2015 as Mondo by Tom Blomfield, Jason Bates, Jonas Huckestein, Gary Dolman, and Pal Rippon who were colleagues at Starling Bank. The company was recorded as the quickest crowd-funding campaign in history as it raised £1 million in 96 seconds in February 2016. The company was granted a license before it changed to Monzo from Mondo in April 2017. It issued several prepaid debit cards for its users for testing and in May 2017, the company announced that its 200,000 customers had spent over £250 million through the card. The prepaid program was shut in April 2018, though.
The company announced that customers could sign up for a current account on 17 July 2017. In December 2017, it discontinued the free ATM withdrawals. It instead replaced free withdrawals with a free monthly limit of up to £200 and charged a certain fee of 3% for subsequent withdrawals.
Monzo reached 1 million customers in October 2018 and in November 2018, it introduced a new feature that lets users pay cash into their accounts using PayPoint for which it charges £1 per each deposit.
In January 2019, the company announced its partnership with Flux to launch loyalty points and itemized receipts. In July 2020, it launched Monzo Plus, a premium subscription service that had gained about 50,000 active users within the first month.
In October 2016, Monzo was valued at £50 million after interim funding and raised over £4.8 million in the funding process. It raised £2.5 million in the second round of crowdfunding.
Monzo is very much backed by its investors such as Thrive Capital, Orange Digital Ventures and Passion Capital, Goodwater Capital, and Y Combinator’s Continuity in different funding rounds to date. Monzo became a pound unicorn for raising £85 million in funds and valuing at £1 billion in October 2018. In June 2019, Monzo was valued at £2 billion raising £113 million in a funding round led by Y Combinator’s Continuity Fund. The company’s valuation is £1.24 billion as of June 2020.
Okay, enough said. Let’s now look into the business model of Monzo.
Monzo Business Model
Monzo being a digital bank generates money from several streams which include subscription fees, interests, consumer and business loans, and partnerships.
Read: Square Business Model – Square Makes Money
To better understand its revenue streams (business segments), let us have a look at the features it offers to its customers.
- Monzo issues a Mastercard debit card for customers to make transactions.
- It lets users set budgets for expenses.
- Users can automatically save money once deposited by putting it aside.
- Customers can split expenses with family and friends.
- Get joint accounts and business accounts.
- Users can connect to accounting tools, which best suits employers.
- Monzo enables users to compare and purchase energy plans to save money.
In exchange for all these services, Monzo charges certain fees. The app and ATM withdrawals are of course offered for free. However, if the withdrawals exceed a limit it deducts a 3% fee. Its mobile app is simple and clean with peer-to-peer payments, real-time balance updates features. It served as a comfortable app for millennials who naturally do not look for mortgages or savings.
So, Monzo’s business model is based on its sales of products and services, integrations, and partnerships. Additionally, it raises funds from its investors for business operations.
So, now that you have seen the Monzo business model. Let us have a look at how Monzo makes from its different revenue streams.
How Monzo Makes Money?
Transaction Fees
Monzo issues a Mastercard debit card for its users, hence cardholders can use the card anywhere in the world.
The company generates a small revenue from such Mastercard card transactions. It deducts a small fee for every transaction using the Mastercard Card from the merchant. It is assumed that the fee could be between 1-3% and is shared between both Monzo and Mastercard.
Read: Visa Business Model – How Visa Makes Money
Overdraft
As you know every bank charges its customers for holding a negative balance in the account. Overdraft is the fee paid against such a negative balance which increases over time if not cleared as interest adds to it. Monzo charges up to 39% overdraft fees per year based on credit score, negative balance amount, and the number of days.
Business Accounts
Though Monzo offers consumer accounts for free, it charges business accounts to cover its expenses and manage operations.
Monzo business accounts are available for monthly subscription fees and can be accessed from the app. The Monzo offers business accounts with two types of plans; Pro that costs £5/Month and Lite which is free.
The Pro version has many features and businesses to help small businesses with their finances.
Savings
Monzo offers a 1.3% Annual Equivalent Rate (AER) per year for its customers for saving funds in their accounts. The company collaborates with other legit lenders and promotes borrowing to create such saving and earning opportunities.
Monzo then makes money through interests collected from such lenders.
Cash Withdrawals
Customers are allowed to withdraw up to £200 every month for free. Monzo only charges a flat 3% fee when the customers withdraw beyond the limit.
Loans
Monzo’s customers can avail of a loan of up to £15,000 from the bank. The Annual Interest Rate (APR) can be as high as 26.6% based on the loan amount and repayment period.
Read: JPMorgan Business Model – How JPMorgan Makes Money
Commissions
Monzo promotes energy providers- Octopus Energy and OVO Energy and offers flexibility for users to switch to the plans. Furthermore, it offers £75 in credit for opting for the plan.
Monzo might earn a certain commission or share revenue with the brands on conversions.
Competitors of Monzo
Neobanks raised about $2.5 billion in venture capital in 2019
Monzo’s competitors are Starling, Revolut, N26, and Chime who raised $323 million, $836 million, $682 million, and $800 million in venture capital in 2019 alone.
Monzo is not a publicly funded company to date, it is only funded through the revenue it generates and funds it raises in venture capital.
The company posted around $51 million in revenues in FY2019. Although the company was in growth mode, it had to pay $61 million from its funds to cover losses after tax.
Bottom Line
Monzo is the new generation banking solution that can be accessed through its mobile app. The company created a buzz without even offering attractive interest rates or bonuses for customers, unlike the big four banks. Although the company has been seeing a negative net income for two years in a row, it manages to raise a good deal in funding campaigns and covers losses. Despite all, the company is still in growth-mode by launching new features and services for both individuals and businesses to ease their financial burden. Hence it is still a company worth considering as there are many opportunities for digital banking in the future.
