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The digital-only bank formally launched its loan product for its existing 2.6 million customers, per CB Insights, at the end of last week, reports the Financial Times. Monzo had been testing the product with around 4,000 customers since 2018, per The Guardian.
While this represents the neobank’s first full foray into the consumer credit market, it’s worth noting Monzo has offered overdrafts since last year, charging customers £0.50 ($0.61) per day when overdrawn by £20 ($24) or more.
Monzo is offering both short- and long-term loans. Qualifying account holders can borrow a maximum of £15,000 ($18,247) for as long as 60 months, or borrow smaller sums starting at £200 ($243) for 90 days. For loans of up to £7,500 ($9,124), the neobank is charging a maximum of 24%, while customers taking larger loans of between £7,500 ($9,124) and £15,000 ($18,247) could be charged as little as 3.7%.
The short-term loans are particularly notable since Monzo CEO Tom Blomfield has previously talked about the idea of launching credit products targeting the much-maligned payday segment. Although he has since backtracked on those comments, the neobank’s short-term product appears to target this group, albeit with much more favorable interest rates.
Here’s what it means: Monzo’s move into consumer loans is a major step in its efforts to boost its thus far anemic revenue.
Moving into customer lending is vital for Monzo given it’s struggled to make money in recent years, despite acquiring millions of customers. The neobank’s revenue soared to £9.1 million ($11.6 million) for its last fiscal year (ended February 28, 2019), growing over 400% year-over-year (YoY).
Monzo’s had 1.6 million customers in its fiscal 2019, meaning its revenue equates to a paltry £5.7 ($7.2) per customer. These lowly figures are a result of the neobank’s free services, which limit its revenue to interchange fees from card transactions and monies it makes from third parties for services they offer on its platform — such as cross-border transfers powered by TransferWise, for instance.
Loans could offer the most lucrative source of revenue for the bank — but that’ll be dependent on a number of factors, including traction among its consumers and its ability to limit default rates.
The bigger picture: Monzo’s move into lending should help mount a more substantial challenge to its established peers — but it’s also evidence of a tweak in its business strategy.
- While Monzo has acquired millions of customers, the majority don’t use it as their primary bank account. Monzo itself classifies customers who deposit £1,000 ($1,217) as salaried customers — and only 30% fall into that category. This suggests that while offering loans may help the neobank make money, it still has significant work to do to ensure its customers deposit large sums into their Monzo accounts, because otherwise its ability to lend will be severely restricted. But should it manage to do so — it’s increased its proportion of salaried customers by 17 percentage points in the past year — then the neobank will increasingly become a genuine adversary to the UK major lenders, balancing strong customer acquisition with a genuine revenue-generating model.
- Monzo’s move into lending also suggests the neobank is somewhat cautious about its marketplace approach. In the past, the neobank said its ambition was to build a financial marketplace where customers can assemble a suite of products from a range of providers. And it has done this to an extent by striking up multiple agreements with third parties to offer consumers interest-paying savings accounts. But the move into lending would naturally be counterintuitive to this, as it needs to have the power to lend those deposits to other consumers if it is to work. I (Mekebeb) also think that the marketplace approach will take several years before paying off, if at all. For instance, Starling only made a measly £35,000 ($42,581) from its marketplace in its first year. Notably, in contrast to Monzo, Starling has already signed a slew of partners to its marketplace, offering consumers investments, insurance, and savings services, among others. To me, this suggests that while the marketplace approach works in theory, practically there is still a long way to go before it can actually deliver meaningful revenue — and Monzo seems to have become cognizant of that.
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