Interest rate rises - impact on Monzo

There’s some talk about interest rates being on the rise again:

I was wondering what this might mean for Monzo. A few initial thoughts:

  • The road to profitability should become easier - more revenue from customers’ deposits held in the central bank.
  • A potential increase in the interest rate payable to Plus and Premium customers? Especially if the base rate goes up quite a bit, the current rates could start looking uncompetitive.
  • More features in the free tier? By attracting increased customer deposits, Monzo could make quite a bit of money from central bank interest. More features (and less paywalling?) might lead to increased deposits, more #FullMonzo and better returns.
  • Greater capacity to incentivise / profit share with customers. For example, the unit economics (the profit per customer) might become good enough to be able to to things like cashback or interest on roundups (yes, these are the Chase features) - and still make a profit.

Having said all of that, it’s an interesting dilemma for the bank: increase the rates on Plus and Premium too much and Monzo actually loses out compared to the free product: the paid tiers work at the moment because you can’t game them to get more in interest than Monzo makes in revenue. But change their interest rates to 5% and that changes…

At that stage in the economic cycle, you might also think about attracting customers to the free tier - more deposits mean more revenue (and eventually more profit). But if you start moving features from paid to free then you’ll need to think about what happens when the economic cycle shifts back again.

Interesting times ahead for Monzo modellers and product strategy!

Keen to hear what I’ve got wrong and how folk think this might play out…

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For now this is an inflation rise, not an interest rate rise!

Although it might lead to an interest rate rise and BoE are making noises about that at the minute. It’s not confirmed, I think they might hold.

For now, if anything it usually means people keeping less money in cash (because it’s devaluing quicker), although probably will have little effect on Monzo as it’s not a place people really put their savings.

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It might be if the savings providers put their rates up again

I’d think they’d follow the BoE? Or you think they might put them up indipendently?

I mean when the Bank of England puts the rates up again. They could put them up a tiny amount before then (I think they’ve done that already) but eventually the BoE will put them up and we’ll see a greater increase

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Again I think the BoE might hold, and if they do go up, it’s not going to be to anything like 5%, I’d expect it to be a 0.25% rise

0.25% to begin with but I can see them raising a few times. Not to 5% though. And I think they’ll hold off a bit longer

Sure - but inflation can lead to interest rate rises:

So this was meant to be a hypothetical exploratory of what might happen if interest rates did rise!

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Right, I see but I think the suggestion of interest rates being 5% was what confused me, one doesn’t rise to match the other. And it’s normally 0.25% rises. I’d think at most, we’ll see up to 0.75% which is what it was at when Monzo started current accounts. And that’s already a very big rise.

Read it again! I wasn’t suggesting that rates would immediately rise to 5% - if you can imagine a hypothetical scenario where rates do rise over a number of years then you do end up with some interesting questions about how to structure your account offerings! One that I hope Monzo and other banks are modelling now. After all - rates dropped very suddenly (and in a way that wasn’t foreseen at the time).

How do you think Monzo might react to a period of sustained interest rate rises (whether or not you think they’re likely)?

I think generally they balance for banks, it goes up and then they pay more to their customers.

It might hurt their lending business quite a bit, they may need to focus on other revenue areas.

I would expect short term Monzo will keep the difference as additional revenue. They’ve never competed on interest rates anyway. Long term, maybe they will rise interest on current accounts but I doubt it will ever be to a competitive amount.