9 August 2019 Courier June/July 2019

Monzo, Revolut and N26: Banking on community

Digital banks Monzo, N26 and Revolut offer nearly identical services. So why do their customers hold such fiercely emotional ties?

‘Cool is not a reason for a new bank. Control is,’ reads a new advert for the Berlin-based digital startup bank N26.

Plastered across London’s transport network, does the ad, one of a series they’ve rolled out, intentionally cast shade in the direction of its coral pink competitor, Monzo?

Such online, branchless services claim to offer a superior experience to traditional high street banks – with only a few quick taps on a phone, a user’s bank balance, spending patterns and savings goals are all revealed, along with transparent information about interest charges and transaction fees.

Yet they’ve turned what are, at their core, boring debit cards (albeit well-designed) into conversation starters with features such as a lack of transaction costs abroad and the ability to freeze your card via the app if you lose it – and they’ve built loyal fanbases in the process.

Monzo, for instance, has raised £23.5m from many of its customers across three crowdfunding campaigns. The companies have built up such goodwill that even amid the occasional security lapse or data breach, sign-up rates remain healthy.

Money, money everywhere

Investors clearly appreciate the community ethos and low-cost model as well. In July, when N26 announced it had raised an additional £134m, bringing its total funding to £538m, it became Europe’s most valuable fintech company. All in, Monzo, Revolut and N26 have raised £1.16bn between them.

Still, turning a profit is tricky. Monzo’s most recent accounts show its losses have widened by more than 50%, up from £30.5m in 2017 to £47.2m in 2018. Revolut also says in its most recent accounts, up to 31 December 2017, that gross losses hit £6.5m in 2017, up 51% from 2016. In February 2018, the company told reporters that December and January were break-even months; but amid a wider international expansion push (Revolut is working on getting its service up and running in the US, Australia and Asia) it’s unlikely to report a full-year profit for 2018.

It’s common for businesses to burn through cash as they scale, but the issue for the banks is how expensive it’s becoming to actually acquire customers. Both Monzo and Revolut have previously boasted about growing their subscriber bases without spending on marketing; fast forward to today and Revolut’s adverts are plastered across London while Monzo has run its first TV ad campaign.

There’s also a more ominous challenge on the horizon. Large traditional banks are taking cues from the startup challengers; when Halifax redesigned its app this year, it was accused of copying Monzo’s look and feel. Meanwhile, RBS and Natwest have teamed up to launch a standalone digital bank called Bó.

Not just a bank

Yet what the incumbents can’t replicate – at least not overnight – is deep customer connection.

An N26 investor told Courier that roughly a quarter of the bank’s customers have taken the time to choose their own colour scheme. It’s not a task that benefits their financial position – but it’s a testament to how much users enjoy engaging with the app.

Such engagement is also a perfect setup for selling. Right now, users of Monzo can switch to eco-friendly energy providers Octopus Energy or OVO via the app, or transfer money overseas using a TransferWise plugin. Revolut is authorised to market insurance products to its customers, and its premium membership tier gives them access to special offers on other financial services. N26, meanwhile, offers loans through German credit marketplace Auxmoney.

The revenue race

The startups may have launched with debit cards and current accounts, but such services are unlikely to be key revenue drivers. Instead, the long-term goal is to create fully fleshed-out financial marketplaces that make their customers’ lives simpler and their money easier to manage. Last summer, Monzo updated its tagline to this effect – its mission is now to ‘make money work for everyone.’

Getting the suite of products right will be critical for the challengers to hold their ground against the old guard. Investors have demonstrated willingness to plug the profit gap until they get there. All that’s left is to wait and see.