How should Monzo get paid for marketplace products?

That doesn’t make sense to me - as long as there aren’t any artificial incentives to make them behave differently, presumably companies will set their pricing based on supply & demand. So if Monzo takes a percentage of revenue then a company that sets a low price for it’s service will not earn Monzo very much commission per sale but will sell more, which means Monzo earns just as much commission as it would from a company that’s set a higher price & sells less as a result.

But users would have to understand that logic, to avoid being put off my that approach of course..as we’ve seen with the foreign ATM withdrawals poll, users don’t always educate themselves enough to figure out what’s really best for them.

On the flip side, if Monzo tries to take a fixed fee, then companies that operate with small margins would be unable to offer their products in the marketplace because if they did, then they would make a loss / insufficient profit from their sales.

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Perhaps Monzo should also pay as small commission to the company when the customer leaves? This would definitely incentives Monzo to seek out the best products…

My comments were directed at @philhewinson, but to address your points:

In a highly competitive market where switching product is a mere tap or two on a smartphone, prices are likely to homogenise. I am not objecting to percentages per se, but different, undisclosed percentages per provider.

Obviously Monzo isn’t going to set its fees high enough that the end company can’t make a profit (or actually makes a loss?!), so I think that this part is a straw-man argument. While large companies can benefit from economies of scale, small companies can benefit from lower overheads, and more modern technology (witness: Monzo itself), so I don’t buy the argument that Monzo should create preferential policies for companies with small margins. As I stated: I think that the deals should be transparent (to users), fixed (in amount), and uniform (across a product category).

Emphasis mine.

We’re on the same page here, I wouldn’t want that either.

To explain, I don’t think that Monzo negotiating a separate fee with every provider would be efficient, in terms of setting up these partnerships quickly, with a wide range of providers & it seems unlikely to be fair to them either, if competitors are being charged different fees. Or if you set the same fee for every provider in a certain category then some of those, with the different models & cost structures that you mentioned, would potentially lose out. A percentage removes that complexity & potential conflict.

I feel like I could be oversimplifying this though so it’d be good to hear if I’m missing anything :slightly_smiling_face:

I’ve been thinking a little about this. I think that we are both worried that the marketplace won’t be good, but have different concerns. You want it to be open to as many suppliers as possible, and I think that is a laudable goal which I share. But my worry is, I think, less concise to convey. It’s tied to some larger ideas. I think that there is a conflict of interest at the core of this marketplace idea, and my worries about that conflict colour how I see it working optimally. The conflict is the same that Google and Facebook have in the advertising space - the user is the product. In their case the person paying the bills is the advertiser, and so the advertiser is the customer and the user’s privacy pays the price. I worry about an analogous thing happening here, where Monzo’s users are the product and Monzo’s suppliers are the real customers. As positive and open as @philhewinson sounds, the unfortunate reality is that Monzo is a business and with this business plan there is an unavoidable conflict of interest at the core.

Ideally Monzo would get users to pay for the service; that way the users’ interests will always genuinely come first. With the bills covered at home Monzo could charge a (reasonable) small fixed fee for referrals, rather than trying to fund themselves by parasitising parts of their partners’ businesses. But, sadly, it seems unlikely that Monzo are going to change their proposed business model because some guy on the forums posted some commentary.

I’ve worked in Shoreditch for a long time. I’ve seen firsthand the decision to make the user the product, what it does internally to product direction. Frustrated, disenchanted developers leaving the sinking ship like so many rats. Monzo’s not there yet, but it’s hard to turn an oil tanker round… and your business plan is kind of like an oil tanker once you’ve taken on ~£40M in funding. C’est la vie.

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Could you please expand on this?

In Monzo’s case, they have specifically said that they will protect user’s privacy -

As we’ve seen with the testing of the energy partnerships & as Tom’s mentioned, Monzo users may effectively pay for the services too, by sacrificing some of the savings that they could have gained, if they had signed up with the supplier directly. But as far as I can tell, that will be the cost to the user (in return for convenience), rather than privacy.

Monzo is offering suppliers a way to access users without paying for marketing & in return, they’re taking a portion of the incentive that the supplier would have paid the user to get them to switch & / or some of the money that they would have spend on marketing, in order to earn revenue. Once Monzo’s has enough users, that could mean that the supplier actually saves money compared to traditional marketing methods, while the user benefits from the insights, along with frictionless access to & management of, the service.

The reality is that if Monzo doesn’t enable access to useful suppliers & give useful recommendations, they won’t earn revenue. So there’s a clear incentive for them to make this service work for users, as opposed to users simply being taken advantage of. Call me naive but it seems like a win / win to me - I don’t have a problem with the suppliers benefiting too.

I’m strongly opposed to that idea because it immediately creates a barrier for those who can’t afford to pay for the service. Presumably if Monzo want to achieve their goal of offering the current accounts to the unbanked, that’s not an option. It sounds like you may have accepted that already though..

What do you mean?

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Plans change. Working in silicon valley I’ve seen people going from being totally anti-advertising to thinking auto-playing video ads with sound are a good idea. In Monzo’s case specifically, in 2016 they said:

over the last few years many banks seem to have concluded that their customers don’t understand percentages, and so instead they charge 50p or £1 per day for going overdrawn. You do the maths! I reckon that’s more like 200-400% in terms of interest. And I thought payday lending was supposed to be expensive…

Then less than a year later:

For the preview, the overdraft will cost 50p for each day your account is overdrawn.

Yes, it’s still a preview, but clearly their thinking has changed. This is why it’s important for the incentives of the company to align with those of users - that way, if people change their minds, it still makes sense to do what’s best for the users.

I guess the problem is that, as many sites that tried to do minimal, targeted advertising will attest (eg. Facebook), you tend to get the best returns simply by showing a ton of ads. Maybe this will be different with something like banking - I guess we’ll find out. Once again though, the issue is with alignment of incentives - if Monzo’s primary income is from advertising/partnerships, and they find out that it’s not bringing in enough income as they expected, then the incentive is to push it harder, and help the advertisers more.

In the end, this is all hypothetical though. If Monzo end up making a ton of money providing a small number of highly tailored offers, with the option of a global opt-out, then it’ll all probably turn out ok. If they don’t, then they’re going to look for ways to increase income, and that’s where a misalignment of incentives worries me.

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As you say, I’ll worry about this when it happens :slight_smile: of course Monzo’s plans will change but there’s no reason why that should be negative. It’s a possible outcome but I think it’s a waste of energy to consider hypotheticals, which are likely to be different to what actually happens anyway, now.

I don’t believe there is a misalignment if incentives -

Do you?

Honestly, I don’t know. In the case of many websites, yes. They’ve found that spamming people with ads barely decreases engagement (to a point), whilst significantly increasing revenue. Maybe with a more ‘serious’/higher value service like banking, peoples’ behaviour will be different, and the revenue-maximising option will actually be showing very few but very useful ads. Many companies thought this would be the case, but have been proven wrong. None of them were banks though.

It really comes down to how people respond and how they behave. If spammy/low quality ads turn them away in droves, then those ads will affect revenue. Hopefully with banking that will be the case.

Trying to predict the outcome of what is essentially a large social science experiment seems like a bad idea, but if people behave like they do on other services, then there could be an issue.

TL;DR Is there a misalignment of incentives? I don’t know. Is there a potential for one? Very much yes.

You have interpreted what I said completely literally and as a result are somewhat missing the forest for the trees. The Google / Facebook case is analogous not because of the privacy aspect, but because a non-user entity is where they generate most of their revenue. Do you know the phrase “He who pays the piper calls the tune” ? That’s what we’re talking about here.

You may not be aware, but this is essentially a Loaded question. You’re basically saying If you disagree with me then you hate poor people. Well, no, I don’t. But I also think that Monzo having a viable and conflict-of-interest-free business model is of more importance than them trying to tackle systemic poverty. You have to fix the first thing first. Additionally, if the fee for using Monzo is reasonable, then there’s nothing to say that it would be unaffordable to even the poorest. But more importantly than that, your statement is a false dichotomy. It assumes that the only reason that some people go unbanked is for financial reasons. If you read your own link there you’ll see that much of the discussion is about people who are unable to prove their identity.

Taking a cut of a partner’s revenue as a percentage for the entirety of a user’s time with that partner is parasitic.

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It looks like we’re past the point where we’re going to have a rational discussion about the pros & cons of the various options. Hopefully other users will understand the points I’ve raised earlier so I’ll leave this here :slight_smile:

It’s a shame that you cannot see the conflict of interest here. I worry that you are blinded by your love of Monzo. But it’s very simple, really. The interests of the user and the supplier don’t 100% overlap, and as the supplier will be the source of the revenue, their interests will come first.

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Thank you all for this great, thoughtful feedback! I can’t pretend to have the perfect model in mind and having considered all of your comments, there will likely be some compromises in any way we structure this. A purist approach would be to do this all for free, but as this is the foundation for our long term business model, we’ll have to make money with our marketplace and build a sustainable model.

We’ll try and choose the best approach to maximise user value and we’ll commit to being transparent throughout. Fundamentally we want to help people manage their finances by building a financial control centre. We hope we can eventually save the average Monzo customer in the order of £1,000 per year and if we take around 10% of the value we create in commissions somehow, that feels fair and should lead to a sustainable model - so directionally that’s where we want to get to.

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@philhewinson I’ve thought a bit about this so if you’ll allow me potifications…

As others have stated, conceptually you have a problem with both models presented here such that there’s always going to be something for a distrustful customer to point at.

Flate Rate Commission

To take the ‘worst case’ analysis and looking in the energy market for ease of presentation:

  1. Flat Commission incentivises the bank to switch every customer to any plan every year to maximise revenue regardless of customer benefit. (No incentive to allow customers to remain on existing plan if cheaper.)

  2. Lifetime revenue share allows the bank to switch every customer once then leave them to their own devices and keep taking a cut. (Reduced incentive to introduce customers to new plans.)

(please remember this is all theoretical at this point! I’m not making any accusations…)

Of the two, I can see a better justification for the second since there is nothing actively preventing the bank from recommending a new plan since revenue will be accrued from either remaining or switching under these circumstances. Given the normal practice of energy firms being a fixed price for a fixed period, however, that does leave Monzo getting paid even once the customer has reverted to a more expensive ‘standard tariff’.

The proposal for ‘limited time revenue share’ addresses the problem with option 2 but pushes us straight back into the problems associated with option 1 where it’s more profitable to make sure everyone switches every year.

Percentage Commission

Once we start taking about ‘percentage saving’ based commission figures, things start to get more complicated.

  1. Flat commission incentivises the bank to switch every customer to the lowest new plan every year to maximise revenue. (No incentive to allow customers to remain on existing plan if cheaper.)

  2. Lifetime revenue share incentivises the bank to keep every customer on cheapest plan for them and keep taking a cut. (Positive incentive to introduce customers to new plans.)

Clearly option 4 looks best here with the only possible issue being that if I decide there’s something I don’t like about the new recommendation and I decide not to switch, the bank still gets money even though I’ve taken my own decision and they’ve done nothing for me. Some may not be happy with that but I admit that I’m straining for a problem here.

The question of reversion to the ‘standard tariff’ at the end of a fixed term still remains, however. Why should the bank still be paid once the deal they recommended to me has expired?

The main problem I see here is one for the bank rather than the customer and it relates to how you measure a customer’s saving in order to base a revenue stream from it. I’ve never yet had an energy supplier correctly estimate my usage so, at the end of a fixed price term, they owe me in the region of £80 to £100. As a result, the amount I pay for energy each month is not a genuine measure of my costs. Clearly, it would be possible for me to tell you what tariff I’m on, but I don’t have to.

Presumably, for recommendations from the second year onwards, you’ll need to measure savings against the SVT I would have reverted to on the first year long contract you introduced me to?

Conclusions

I agree that compromises will be required, if only because I don’t think there is going to be a perfect model for this sort of thing. In hindsight, the energy market wasn’t the simplest thing for me to try anyway because of the time limited nature of the deals on offer.

I may have a rethink around annual car insurance, for instance, which would provide a simpler model to start from.

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Thanks for your thoughful comments @Feathers! I think aiming to make a % on the savings a customer makes is a useful directional goal, but not necessarily something that will land cleanly into how we structure these deals. My impression is that we will probably structure things differently based on the product as each area is different, so we’ll probably approach this case-by-case, but with the above directional goal in mind. Even within a product area, we could structure it differently too - for example, we might setup a model closer to a life-time rev-share for a single tariff energy supplier, but have a fixed-fee or one-year rev-share deal for a supplier that reverts to an SVR after a year, which would align us better to the savings a customer makes.

Really interesting thoughts from @Feathers:

I personally like the limited time revenue share - limited to 12-18 months.
If we’re purists about it, we would say that this encourages plan changes after this point - however, it’s reasonable to suggest that if the deal they are currently on remains good - there’s no need to change. Monzo aren’t judging (or chasing revenue) here, just providing options.

The other issue is that most marketing effectiveness is either:

  • acquisition focused (new customers, clearly the primary benefit of the marketplace)
  • loyalty (keeping existing customers, they don’t need the marketplace for this at all)
  • recovery/re-engagement (turning stale customers into active ones - not really relevant to the marketplace, but possibly the feed?)

Clearly the marketplace is about surfacing new integrations that offer value to customers - so it’s about acquisition ultimately.

@philhewinson - I’m interested to know how marketplace will work for services that are less focused on generating revenue? i.e. banking information and PSD2 data freedom/management requests?

Clearly if we’re not too careful, the marketplace will only focus on profitable acquisition verticals such as insurance, etc. Although perhaps that’s the aim?

Could other worthy services can just use the API for that purpose fee-free, would that work?
Looking forward to your Open Office Q&A at the end of the month to hear more! :raising_hand_man:

The ideal model would be for Monzo to take a percentage commission for a year of the money saved over what the customer would have paid had they stayed with their previous supplier. This would incentivise Monzo to continually shop around for the best deals for its customers, and also give it the opportunity to make some revenue. The percentage should be a decent chunk - e.g. 20-25%. However, a significant challenge to this would be that you’d need to find a good transparent mathematical model and some good data scientists to make this effective.

I’ve been working on a startup that helps people find better deals for their household services on an ongoing basis, and as a very happy long-time Monzo user I thought I’d add a few comments to this very interesting discussion:

  • There are quite a few changes coming up in the future which will likely change the competitive landscape. Namely smart meters giving comparison services instant-access to users usage information, the centralised switching service (CSS) enabling next-day switches and much more reliable switching, and also the number of startups entering the market that will be helping people switch to cheaper deals for energy & other household services.
  • These changes may mean that finding a model which prioritises maximising the savings and number of suppliers available to a customer becomes even more important, due to competition. Currently what’s happening with price comparison websites is that some of the very best deals are not available due to high commission costs.

I think a percentage based model could definitely be a step forward in general, but I would also add that making sure whatever deals you strike don’t exclude too many suppliers is important for the customer.

A few other approaches I’ve seen tried out include:

  • Not accepting any commission fees from suppliers (in order to remain entirely impartial), but taking ‘a small percentage of the savings we make you’ from the customer
  • Charging £25 per year, but guaranteeing a saving of at least £50

Great to see Monzo (as alway) being so transparent about this!

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This makes sense. No lump-sum commission. Instead a percentage based on saving. The greater the saving for the customer then the greater the percentage for Monzo for the recommendation.

On the face of it, that appears to be the best way to do it. Is there a catch?

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Yeah I think it is a great approach in theory, two downsides / challenges might be:

  1. Marketing - I haven’t had direct experience with this proposition, however I do know that money is a big driver and it’ll be hard to avoid some people viewing the % that Monzo keeps being ‘taken away’ from them. Also this could create competition with competitors, where they drop the % they ‘charge’. If the revenue is ‘behind the scenes’ then this issue goes away - a major reason why comparison sites do this now, rather than ‘charge’ the customer in some way and do whole-of-market, even though it would be in the customer’s best interests - people are irrational and it’s ultimately more profitable that way.
  2. Economics - the long-term sustainability of this approach is a tricky one. Year 1 is fairly simple, you’ll probably be saving the customer £200-£300 for energy, take 10% and that’s fine. Now they’re on a good deal though it’s unlikely they’ll save more than £100 year 2, if prices are rising they might even pay more. Taking a % of the savings based on their original deal forever would get around this, however it might be a hard sell.

And a smaller issue is that it could incentivise Monzo to switch customers to the very cheapest supplier to maximise their revenue - even if that supplier is rubbish. For example, right now IRESA energy will save you about £350 for an average user, but they’re terrible. Bulb might save you £250 but they’re way better and worth it though. Although I think competition in the utility-switching space should prevent this - given that Monzo are a decent company that wouldn’t want this to happen to their customers of course :slight_smile:

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