Monzo Marketplace: a race to the bottom?


(Duncan) #1

I really like the idea of the Monzo marketplace for financial products (savings, mortgages, electricity and gas providers, insurance, …); the stated long-term goal for Monzo’s product and, crucially, revenue stream. However, I worry that it is internally inconsistent. In the recent open office @tom answered a question about this where his reply included:

If you are too effective at switching then you actually kind of destroy the individual market you’re in.

and then:

Without giving you my really long thesis on price comparison and where that industry is going [laughs], I think that the future of price comparison lives in the current account.

and, further, later on:

And so I think that in principle we would prefer to work with providers who have long-term sustainable pricing.

Now, perhaps this alluded thesis is indeed the explanation that I am looking for, but allow me to ask the question in lieu of knowledge of it: for many of these product categories there is almost no essential differentiation between products provided by different providers, save for a single number. Think of a basic savings account: interest rate is king. Or an electricity provider: fundamentally you are paying per kWh. Much of the product differentiation that providers concoct is aimed to create differentiation where there is none (and, somewhat to dupe the customer with, say, favourable introductory rates) - and, from Monzo’s rhetoric, this type of obfuscation is what they are aiming to cut through. So, what happens once Monzo has stripped out all product differentiation from each of these product categories and made it a couple of clicks to change between providers? Will providers want to sign up to a system that may “destroy the individual market”? Would these individual markets end up as monopolies with winner-takes-all? I do, of course, understand that in some places (such as where capital is at risk) that there is choice to be had (pick-your-risk). But in many - if not most - of these product categories the products are so similar that the above scenarios seem inevitable.

So, to summarise: is Monzo’s marketplace strategy internally inconsistent, where the inconsistency stems from reducing switching friction and then simplifying comparison of products in categories where there is no real differentiation?


(Andrew L) #2

I think this is a really interesting point. If, as you say, the underlying product or service is commoditised then you are absolutely right - it becomes a cost leadership game (although the promo model that Tom alludes to doesn’t necessarily need to apply, that it just an artefact of customer inertia). It becomes more challenging again for banks as the balance sheet providers because they will have liquidity challenges that they need to deal with and so we will see more and more ERCs and fixed term bonds.

I would argue however that there can be differentiation for the product sets you have identified, it is challenging to convey the differentiation due to the way in which price comparison engines rank results. If we can find a way to convey differentiation in the product suite then the pricing can account for it. e.g. when booking a hotel do I pay more to stay in a Sheraton than an Ibis, because I know the associated ‘value’ of the service I am buying and can quantify it to justify the difference in price.


(Marta) #3

I really like where you’re going with it. But there is one thing I disagree with - customer experience and quality of the product. Sure, in terms of bills, electricity is electricity, it might be temporarily outage (storms, floods, maintenance), but will be back. But could the same be said about other typical bill - Internet access? I’m sure that many users can write a short novel on their problems with internet, I know I could do this. :smiley:

A lot of other products, like mobile insurance, travel insurance - quality of interaction between user and company is sometimes more important than just total ££ you pay for 1 year. Contract rules, existing medical conditions excluded from contract (diabetics or other). Max age for insurance? Options like insuring for 8 day trip or maybe full year travel insurance? Chinese phones excluded… No insurance for non residents (I had this problem, I couldn’t insure because I was only few weeks in UK). Options to insure whole family for a trip (discounts?) or all household phones.

As a person who recently underwent whole painful process of finding travel insurance, I don’t perceive it as just price difference. I actually went through 5 different sets of T&C, and after my migraine was gone :sweat_smile: , I definitely wouldn’t say that I made my decision based just on price. I was comparing options between £30 and £100, I got one for £65.

In my opinion, this is how many people decide now about market-place like purchases, just price. I did it for my phone contract (and now I regret it, but I’m too lazy to change it), I did it with my internet. I’m not sure I got the best deal in either case. People got so used to comparing price only because it’s totally makes sense if you want to buy particular model of a blender - we go and search place where we can buy it cheapest (including P&P). But before we know what blender we want to buy, we compare number of functionalities for many different blenders.

If marketplace actually doesn’t revolve around just price, but also all additional elements, painting a bigger picture of extra services purchased by users - this is where marketplace will win. This is how I interpret same talk you quoted Tom from, Monzo giving a ‘Monzo’ stamp on better user experience, but it might mean that price is higher, or sign up process is longer and so on.


(Sacha) #4

Ultimately, if everybody used a marketplace, the profit would be removed over time and these wouldn’t become viable.

In reality though, only a fraction of customers are prepared to switch regularly. As such, they will inevitably get the best deals which make the provider a low or negative profit. The providers hope a proportion of the customers will be too lazy to switch once the initial promotional deals end and they become far more profitable.

I’ve lost count of how many times I’ve threatened to leave Virgin Media to get a better broadband deal :grin:


(Alex Sherwood) #5

It sounds like you’re essentially describing the impact of increased competition on prices & the fact that increased competition will force providers to differentiate their products & offer better pricing.

You’re absolutely right about that & that seems like a good thing to me.

It’s up to the providers to differentiate themselves & it’s up to Monzo to give us access to as many providers / products / services as possible so that we can choose those that best serve our needs.

The only markets that should be destroyed are monopolies / oligopolies that haven’t had any real competition before. That’s generally a good thing for consumers. As a general rule, increased competition is also healthy for a marketplace, even if it hurts some uncompetitive providers or even puts them out of business.


(Jamie 🏳️‍🌈) #6

Is that always true though? Look at the deregulation of Directory Enquiries as evidence of a simple monopoly which was opened up to a ‘competitive marketplace’. The result, years later, is a vastly inferior product, HUGE price increases, absolutely no value for money, and consumers unable to decifer labyrinthian tariffs.

In short, a complete mess, and an example where a properly regulated ‘utility’, despite existing in a monopoly, would be better for the consumer.


(Alex Sherwood) #7

Fair point, utilities may be an exception as you do need challengers who are able to take over the service & capable of delivering. There might be other exceptions too :cold_sweat:

Tom did say that Monzo’s steering clear of the gas & electricity providers.

Assuming that the viable challengers are there though, I’d still argue that no monopoly is better than a monopoly.


(Duncan) #8

Hi Avishai, you raise some interesting points. Let me address them. There are two ways to evaluate these services - qualitatively and quantitively. While Monzo aims to provide a better qualitative experience with its own current account, the marketplace will most naturally be a quantitive comparison. This is because it’s hard to rank any product from a qualitative perspective, which is subjective and that subjectivity will often be different for different users. Further, such rankings are exposed to being gamed.

There is a further complexity in what you outline - quantitative, but complex products. Here, the devil is in the details and again it’s no easy task for Monzo to give you an ordered list of the “best” one for you. As you outline, a £30 travel policy will not cover the same things as a £100 policy, but comparing the details of these two even quantitively is not easy (do they cover your laptop? If so then how much can your laptop cost? Is there a single item limit? What if you cancel the holiday? Under what circumstances is that legitimate? The list goes on and on, and the superset of these items is in fact the entire policy wording itself).

My above outlined points really only apply to things that are ranked quantitatively - general savings accounts, ISAs, gas, electricity, water - but these constitute a large proportion of the services which would be available on the marketplace - and would probably be the first added to such a marketplace, due to their relative simplicity - and would be subject to the market dynamics that I outline.

When you talk about the Monzo “stamp” of better user experience that Tom mentioned in his answer, that was really about decreasing friction in switching. They want to make it “only a few clicks”. Tom does mention preferencing services which are more honest - giving you the same rate always rather than one that they loss-lead and then bump a year later - but this only plays into my point about removing any sort of differentiation.

TL;DR: Monzo marketplace isn’t going to solve qualitative comparison of products, and it’s effect on quantitive comparisons may be to destroy any competition at all.


(Duncan) #9

I think that I covered most of this in my reply to @Avishai, but the relevant point is that for complex or qualitative comparisons, Monzo marketplace isn’t going to really be a magic bullet.


(Duncan) #10

Interesting point, but I think you’re using a historical frame of reference - specifically that it’s cumbersome to switch. Monzo’s stated goal, from Tom in that video, is to make switching almost friction-free. One or two clicks on the device that lives in your pocket, or nearby you, all day long. Further, they are going to send you a push notification when there is a better deal detected by their systems. So I think that you underestimate in this future frame of reference how easy it will be for people to switch to a better deal. In that context, I think my above scenarios apply, and are worrisome.


(Duncan) #11

Or British rail. Sigh.


(Duncan) #12

Kind of; kind of not. Let’s break this down:

I’m really saying the reverse, in both facets. You’re saying here “increased competition” --> “more product differentiation”, whereas I’m saying “merciless concentrated price comparison” (i.e. less product differentiation) --> “less competition”.

See my reply to @Avishai for how I think this breaks down (simple-quantitive, complex-quantitive, and qualitative). My comments are aimed at the simple-quantitive case; the others suffer from their own problems.

I agree that increased competition is good. But for simple-quantitive products I think that Monzo marketplace will actually decrease competition, if it were to become the centre of 1 billion people’s financial life (i.e. their gateway to all other financial products and services, as is Monzo’s stated aim).


(Alex Sherwood) #13

That doesn’t make sense to me. The whole point of differentiation is that it enables companies to avoid competing solely on price. If they don’t compete via differentiating their offering, then yes it will be a race to the bottom & that would be suicide.

I think you’re oversimplifying this. In most cases, companies will be able to differentiate - again, utilities may be the exception. But even broadband providers are now offering media bundles to.. you guessed it, differentiate themselves. Saving’s providers can come up with lots of different ways to package their product & enable users to earn interest, look at Nutmeg, Zopa & Lending Club, for example. Even the international transfers market was shaken up by TransferWise.

It’s also worth pointing out that it’s these innovative providers who are most likely to have the ‘advanced technology’ sarcasm (APIs) that will enable them to integrate with Monzo, via Monzo’s marketplace.

Having said all that, I do agree that if competition based solely on price really is the only option, then it would be bad if eventually a market is squeezed to the point where there’s only one or two competing providers.


(Duncan) #14

The first, and according to Tom best / most apt, application of the marketplace will be for savings. If we consider non-risky savings (i.e. traditional things that look like savings accounts), where do you see the product differentiation? To me it seems pretty clear that in this category one thing and one thing only counts - rate of return. There are many categories like this. My problem is that when we hear the Monzo team talk about this marketplace, it is usually in terms of alerting you when you can switch for a better rate, and making that switching process very easy. This can only really apply to products where there is a way to compare trivially, and that excludes items which are complex-quantitive and qualitative in nature). To me, at the moment, the idea of the marketplace seems paradoxical.


(Jolin) #15

I think it’s difficult to say the marketplace won’t be able to account for qualitative comparisons, when we’ve not seen any kind of preview of what it will look like, or how it will operate. Given its centrality to Monzo’s vision (and the approach to app development to date), I would expect careful consideration to go into the design of the marketplace, and it won’t simply be a price-based ranking. Even existing comparison sites provide more context and an indication of customer satisfaction.

On the example of savings accounts specifically, there is differentiation around access (instant, x times per year, notice required) and what your money is invested in, amongst other things. So even that is not a straight price-based comparison.


(Duncan) #16

True. However, I don’t think that qualitative comparisons are part of this race to the bottom.

Me too - which is my motivation for raising a potential issue. Early.

For simple-quantitive products I think it will skew that way. If all a customer cares about is a rate, and needs little to no interaction with the company otherwise (friction-free switching), then price is going to be the dominating factor.

Yes, risk and access are both issues - but they push the product towards being complex-quantitive. If things are complex then you need a human in the loop, and they become hard to compare. It’s all apples and oranges. While you may be able to construct an interface to filter down the options regarding access, you certainly can’t do that in any sensible way for a risk profile.

However, if we focus on simple-quantitive products, of which there are many (you suggest choosing your risk, but bear in mind that many more people have a basic savings account than have a customised stocks-and-shares ISA), then this race to the bottom seems inevitable. In fact, let me grab that Tom quote again:

If you are too effective at switching then you actually kind of destroy the individual market you’re in.

There is an internal tension in this statement. You want your product to work - but not too well.


(Jolin) #17

I guess this is what I’m hoping Monzo does do – figure out a way to make complex-quantitative, and quantitative, comparisons possible. I’m hoping smarter minds than mine are working on different ways of tackling these problems, so that key features can somehow be summarised and compared, so that I could at least narrow down a set of products to a short list which I then investigate in detail.

I wasn’t clear in my wording. When I said, “what your money is invested in”, I was thinking of a traditional savings account with no risk (to the consumer), FSCS protection, predictable interest. But even here, people will choose the financial institution based on whether they invest your savings in arms companies, oil companies, sharia-compliant, etc. E.g., do you go with RBS or the Coop (in more innocent times)?

Stocks-and-shares is a different category of ‘savings’ altogether in my mind (in terms of comparison criteria).

I agree with you that there is a tension, and you’re right to raise it. I guess I’m just adding my vote to say that I’d like the marketplace to be something that really aids selection beyond the simple-quantitative. It needs to be more than an easy way to switch between different fee structures.


(Duncan) #18

I’ll be interested to see how both sides are tackled. It’s certainly no piece of cake to take a complex array of facets (especially with insurance policies) and display them to the user in a ranked order. However, as in the title of the thread, I’m really very interested in how essentially undifferentiated products which rely on a single rate will be able to compete, which seems paradoxical.


(system) #19

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