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.

It’s behind a paywall and I’m not subscribed so entirely sure what it is actually saying (I know you can get around the paywall easily, just not that bothered about it at the momeny).

So going by the brief bit in excerpt. Neobanks are in trouble because the big banks have another excuse to fleece more of the customers?

I don’t buy it. Any bank with the audacity to put their rates on credit up after lowering them not once during the decreases loses my custom plain and simple. Whether it impacts me or not. Amex are already gone.

I’d argue this sort of thing is better for the new banks. Their lower costs mean they can be more competitive. The theory behind their setup as Mark Mullen always banged on about, is they could pay higher rates to their customers, whilst simultaneously charge them lower rates too and rake in more profit per customer than the big guys.

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Not sure who Mark Mullen is but his prediction didn’t exactly work out so far!

I think the article makes a good point about the rise being better cor the traditional bank model of flipping deposits into loans. But it’s only a .25% rise so I don’t think anyone is being ‘killed’ just yet.

CEO and Co founder of Atom Bank. Former CEO of First Direct.

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Right, and Atoms ‘higher interest rates’ lasted how long :sweat_smile:

About as long as the base rate did before falling to record lows. That’s why I think this will benefit them more. Mortgages will start going back up, but I don’t see Atom’s budging as much. Prior to the record lows, they were cheaper and better in every aspect than the best deals offered by the big banks.

Their fixed savings have been done weird, being adjusted as a means to try to control flow of sign ups more than anything else. It’s a balancing act. No matter how low the cost base, they can’t afford to pay out more interest than they bring in from their lending products. No bank can. But the advantage here is more to do with sheer volume of customers of the big guys, not so much the rates or costs involved.

Their instant saver has been very competitive throughout though and market leading at several points. They’re behind the industry leader now, but that’s because the current leader pre-empted the increase and Atom have yet to react to it.

I really doubt there will be much of a change from Monzo’s end.

As soon as rates go up everyone is quick to ask for interest to be paid, but Monzo have never paid interest on their current accounts (apart from Plus/Premium), and people forget that Monzo had to endure the loss of earnings from the BoE interest when rates dropped from 0.75% to 0.1% during Covid.

Now they’re going back up, coupled with a return to growth and normality, plus new lending products - hopefully Monzo can start to realise some of their potential.

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They are looking pretty good at the moment :slight_smile:

Well this is a mess of an article.

Highlights:

  • Monzo and Starling are known for their “nifty banking apps and coveted coloured banking cards” but “are still struggling to make big gains”.

  • Average of two current accounts per UK adult (I suspect the folks round here are a bit above average). “FCA research suggested that only one in four challenger bank accounts was used as someone’s main account.”

  • Switching is a thing but big banks still dominant.

  • Big banks do regular savers!!

  • Big banks lend more. They offer mortgages!

  • Begrudding acceptance that Starling is kinda doing okay.

  • Big banks have improved their apps.

And then the kicker of a closing sentence:

It is going to take more than a pretty coloured bank card and a whizzy app to challenge that kind of dominance.

None of this is necessarily wrong, but there’s no greatly coherent narrative and misses the important point about Monzling having a much much lower cost to service. And I’m still baffled at why regular savers are seen to be exclusive to high street banks - and why there’s no real discussion of what interest rate rises actually mean commercially.

@AlanDoe might be worth moving these messages over here?

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