It 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”.
How does Blomfield convince them? “Well,” he replies, “the answer for them, frankly, is that you get free foreign exchange. And they go, ‘Ahhh, I get it.’ But that’s totally missing the point. For something like 90% of our customers, the free foreign exchange is nice, but they might go on holiday once or twice a year. They are living on an average salary and it’s about visibility and control. It’s the feeling that: ‘With my old bank I never knew how much money I had at any point and I’d spend over a weekend and on Monday morning all the charges would hit my account and I’d realise I’d overspent and it caused me anxiety and stress.’”
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.
Monzo has had thousands of customers on a waiting list for its cards. Photograph: Alex Hern for the Guardian
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.”
Reported by: theguardian online newspaper