Monzo: the bank that doesn’t want to be

Monzo, the UK-based challenger bank favoured by those who like to drink £6 Negronis at rooftop bars in South East London, reported its results for the 2019 financial year last Thursday.

As ever, the FT’s Nick “quick draw” Megaw did a stellar job reporting on the results in his interview with its new chief executive, TS Anil, who took the reins off co-founder Tom Blomfield this year.

Discussed was Monzo’s widening losses – £113m from £47m the year before and the revelation that coronavirus has “cast significant doubt” on the bank’s ability to continue as a going concern. Gulp.

Flicking through the results, and it’s achingly clear what the problem is: Monzo has yet find a real business model. For Alphaville readers, this won’t be much of a surprise. The now departed Tom Hale wrote on Monzo’s search for a pool of profits back in late 2018, as well as in 2019 when it announced it would begin to, shock horror, start lending.

It seems that plan hasn’t really materialised. Here is Monzo’s balance sheet:

Despite customer deposits of just under £1.4bn, Monzo had only made £124m of loans and advances, net of provisions, at year-end. Or just over 7 per cent of its asset base.

Scroll down to the footnotes, and you’ll see that only £68m of this lending was actual loans, with the remaining balance made up by customer overdrafts (which the company has taken a rather large provision against):

Monzo is of course still a relatively young company, so it is understandable that it’s still taking business baby steps whilst focusing on growth. It’s also worth bearing in mind that lending is just one of its possible revenue streams, with the company launching a £5-per-month premium service earlier this year and earning decent income from transaction fees.

These teething problems have, however, got Alphaville thinking about the ethics of how it conducts its business.

At its core, banking is about channelling idle savings, in the form of deposits, to those who need capital to, say, build a business or buy a home. In return for their hard-earned cash, depositors receive interest from the bank – and somewhere safe to park their savings. In turn, the bank earns its profits by charging higher rates than those available to savers to those it lends to. Easy right?

Monzo right now does nothing of the sort. It hoovers up deposits and sits, Smaug-like, on the idle cash. Monzo’s balance sheet highlights this. Its £1.4bn in customer deposits is almost completely matched by £1.37bn in cash and cash equivalents, most of which is held at central banks:

The rest of its liabilities and equity are tied up in assets such as previously mentioned loans and overdrafts, £99m of gilts and various business related assets such as property, plant and equipment (office leases, computer equipment and whatnot).

Of course, how Monzo chooses to allocate its deposits is at its discretion. It doesn’t have to lend the money if it doesn’t want to. After all, there seems to be a willing line of investors looking to fund its growth for the moment.

But isn’t there also an argument to be made that if you have the privilege of £1.4bn of cheap capital endowed to you, that you should be making it sweat? Although the amount of potential credit to be lent is small in the grand scheme of things, there are no doubt plenty of willing borrowers with solid credit scores looking for cash, particularly during the current economic crisis. Choosing to sit on it instead seems, to Alphaville at least, a waste.

Perhaps the issue isn’t so much that Monzo doesn’t want to lend, but is just getting to grips with the practice. Building the sort of customer base who think of you as a reliable source of credit, rather than a flashy current account, takes time. There’s also the issue of culture. Lending is a difficult business and shifting the gears away from a growth mentality to one with a focus on mundane banking tasks, such as customer due diligence and compliance, isn’t easy. Just ask Metro Bank. Nor is this made easier by Monzo being online only, unable to foster the sort of relationships with the local community that have traditionally provided a strong basis for granting credit.

Monzo arguably revolutionised the customer-facing side of current accounts, and was duly rewarded with a slug of deposits. But now comes the hard part: putting that capital to productive use. If the failed history of fintech – from Lending Club to RateSetter – tells us anything, the process won’t be easy.

Related Links:
Monzo: When is a bank not a bank? – FT Alphaville
How Monzo is banking on customer apathy – FT Alphaville
Monzo: a serious risk of a bank breaking out – FT Alphaville
Monzo: metal gear solid – FT Alphaville