There’s some pretty shocking findings in this report about the incumbents use of overdrafts to subsidise ‘free’ current accounts. In particular -
Just 2 per cent of accounts pay more than half of all overdraft charges.
So given that Monzo appears to be relying on lending (& initially at least, overdrafts) to cover it’s costs until the marketplace is generating significant revenue for the business, I’m keen to hear how Monzo is avoiding this type of scenario, which appears to be exploiting vulnerable users.
I know that Monzo has made a significant effort to make sure that users who are unable to pay off their overdrafts quickly, to help users manage their borrowing & to eliminate punitive fees. And Monzo’s lower cost base means that it doesn’t have overheads that are anywhere near as large as the incumbent’s to cover.
But even so can Monzo make the money it needs to from overdrafts by having a relatively large portion of it’s users pay a relatively low amount of overdraft fees or will it end up with a small portion of users paying most of the charges?
I hate using mentions but I think this question is important enough to deserve it - @tom@paul@venkat.
Before the conversation get’s too deep - Can I just point out that if you Google “FCA retail bank review highlights pressure for reform” - You’ll be able to read the article (for any non FT subscribers).
“Despite repeated pushes to increase competition and encourage new entrants to the banking sector, the current account market is now more concentrated than before the financial crisis, with the six largest providers — Barclays, Lloyds Banking Group, HSBC, Royal Bank of Scotland, Santander and Nationwide — controlling almost 90 per cent of the market.”
I think Monzo, Starling and every other challenger bank have plenty of opportunity to gain customers…
I think Monzo have shown this not to always be the case especially with rates being so low:
The report said “this has created a barrier to entry and expansion”, as challengers “need to offer retail savings deposits with significantly higher interest rates than incumbent banks to attract and retain more price-sensitive customers”.
You might be right but I’m not sure how you’ve made the connection between those two things to be honest. I expect the marketplace will earn Monzo far more revenue than lending eventually. A) because marketplaces can make lots of money (to use an extreme example - Apple’s App Store) & B) because Monzo’s said they want to keep their balance sheet small, which implies not very much lending.
TransferWise isn’t losing - it’s mutually beneficial. TransferWise effectively just gained 700k and growing prospective customers. If their partnership works out and TransferWise stays in the app for the long haul it could add multiple points of marketshare for them.
The other side of the coin worth noting here is that Monzo’s cost base is a lot lower than other banks - no branch network, no marketing spend, simple (relatively) and modern tech stack, no armies of people maintaining myriad other banking products. So the amount Monzo need to make from either lending or marketplace to break even is going to be a lot lower than the legacy banks