They’ve raised investment capital, got regulatory licences, built the first versions of their banking apps and attracted some early adopters. But it’s about to get tougher for digital bank upstarts.
This is mainly due to consumer uptake. So far, Monzo has been a fintech phenomenon, claiming to have reached 240,000 users by July this year and be on track for 500,000 by the end of 2017. It saw a 5% increase in people signing up per week in the first half of this year.
In the week Courier went to press, Monzo raised £71m, valuing it at £280m.
But can it appeal to a wide range of people, beyond the mid-30s city-dweller who has become its typical customer? Monzo and its competitors will have to justify their visions and valuations soon.
International expansion is one way to show progress to prospective investors if the number of people signing up in the UK slows down. Ever since the Brexit vote, the digital banks have all been facing up to the prospect of finding a local partner bank along with a local licence, if they want to expand into Europe. As recently as November, Revolut confirmed it was applying for a European licence.
The broader challenge is in clearly defining just what these new banks are offering over and above their competitors. So far, they’ve appealed to customers with fresh brands and a pleasant interface for checking balances and making transactions on a phone. Now, however, they need to offer significantly more than just that.
HSBC, Barclays, Lloyds TSB and Natwest have been making efforts behind the scenes on their banking apps, which they hope will exceed what the challengers have done.
Monzo lured many customers through what was probably its most popular feature: it didn’t charge any fees for withdrawals from foreign cash machines. However, it scrapped that feature recently as its ATM costs more than doubled to £16 per active customer, per year. Just 13% of users were responsible for 85% of these mounting fees.
Monzo recently asked its customers to help it come up with a fair means of charging for foreign cash withdrawals. It will be watching to see if diluting this feature will slow down the number of people signing up and regularly using its cards.
Over the coming months, the digital banks will also be expected to show a clear path to making money. Starling has emphasised business banking as a means to move into a segment of the market with more options to monetise. Atom operates more like a conventional bank, selling mortgages and products that big banks make money from.
Monzo, meanwhile, knows it has to wean itself off the easy wins of pre-paid charge cards and into the more serious current account business if it is to live up to its newly engorged £280m valuation.
It has also pulled in next-to-no money from its customers so far – a paltry £120,000 in the year to February 2017 – and posted a pre-tax annual loss of £6.7m in that period.
Monzo has been suggesting a variety of prospective means to generate income in the future: from lending to being a broker for third parties – whether that’s insurance, mortgage or even energy providers. For the critics, this has all been speculative and woolly so far.
The more immediate problem for Monzo is that it loses money with every person it currently signs up – roughly £50 per active customer per year. However, it says that reducing its foreign cash machine fees will reduce that cost. The cash drain from acquiring and servicing customers and the need to keep growing will likely mean having to go back to investors for more funding.
Atom is the only one of the big digital banks to have a sufficiently large cash pile (£216m in investment so far) to operate as a fully-fledged bank for a substantial period of time. The others will soon be back fundraising for their next round of investment.
Investors will be interested in a few signs. Momentum – or lack of it: are people signing up and using these companies as their primary banks? The other two indicators will be whether they can keep improving their apps to be markedly better than the incumbents’, and, crucially, whether they can make money.