I’ve just spotted a this tweet from Bilal Djelassi who works at Orange Digital Ventures who are one of Monzo’s investors -
As you’d expect this article is an excellent, in depth explanation of the challenges the the retail / legacy banks face, when trying to compete with Monzo & also, what makes Monzo’s business model so valuable -
Thanks for sharing Alex - great article and interesting to read their thesis. I would however challenge “Retail banking innovation can only come from neobanks” - I think the Tech Giants are perfectly placed to bring innovation to the retail banking market if they choose to do so (see Apple Pay as a great example). I would also argue that some of the large incumbent banks will disrupt themselves (and their associated value chains and business models) to bring innovation to the market.
Tom has pointed out that they’re earning a lot of revenue from things like punitive charges too. We’ve seen Lloyds move away from those but it might put people off using their overdrafts now. So to disrupt their business model, the banks will have to take a loss in the short term & that’s very hard to do if you’re a public company & have a large cost base etc. Tom does a much better job of explaining the challenge than me of course, at 16:39 in this podcast, for example.
It’s true their legacy systems are pretty poor but some banks are already taking steps to address that (e.g. http://www.cbonline.co.uk/personal/current-accounts/b/) which I think is built from the ground up and they are trying to migrate ‘digital’ customers onto it. I can see other banks doing the same or buying something like Solarisbank to use.
Banks in general make about 25% of their revenue from non-funds based income (i.e. not from lending), of which a proportion will come from unauthorized overdraft fees but a significant amount will also come from arrangement fees, account charges, interchange etc.
No-one has figured out how to monetise the ‘marketplace’ or ‘platform’ banking yet but let’s see what next year brings!! The challenge for the NeoBanks is that they need to figure this out and execute before the funding dries out.