ONLINE BANK: Lessons from Monzo's annual report and £33M losses

We love unfair comparisons, but there's a reason behind the madness. Crypto currency exchange Binance is on track to print $1 billion in profits this year, while neobank Monzo has a £33 million loss to show for its £109 million in venture funding. Here's another one: Coinbase now has about $20 billion in addressable (custodied?) assets, while Monzo has £71 million (<£150 per account). One way to think about these companies is (1) store of value in crypto currency, vs (2) facilitating payments and commerce via fiat. And in this way the comparison evens out. The crypto companies to date have failed in making BTC a medium exchange, instead choosing to take economic rents through capital markets. The neobanks have hit the wall of trying to get profitable at scale, though Monzo's 750,000 users and £2 billion in facilitated payments transactions points the way. Looking at Revolut, we see about 2.2 million users and $18.5 billion of transaction volume. That's a medium of exchange story.

Two more thoughts on neobanks. The burn should slow down and economics seem likely to improve. On the revenue side, consider that most of the neobanks (Monzo included) started out as pre-paid cards that you load, with a nice mobile interface. That's pure cost, because the Fintech has to pay a third-party for each card while making no revenue of any kind. So Monzo's conversion from pre-paid card to current account under a banking license matters, because they can actually make spread revenue on deposits. On the cost side, the neobank claims to have reduced the cost of maintaining an account from  £65 to £15 -- pretty good operating leverage, but for the upfront cost of acquiring the customer. Since the market is crowded (Revolut, Starling, N26, B Bank, Finn, etc.), we expect venture funding to continue fueling the turf war.

And second, the implementation of Open Banking may not be going according to plan. As a reminder, European legislation PSD2 is supposed to expose incumbent banking data via structured APIs to third parties that want to build upon banking information and money movement. In theory, this lowers the stickiness of bank accounts, allows data to travel safely into aggregators and apps, and lays the groundwork for financial bots and agents that make shopping decisions. Surely, neobanks would benefit from the ability to see and move these traditional assets. Well, maybe not. According to blog Open Banking Space, major barriers stand in the way erected by incumbents: "(1) lack of rich data or functionality on the account information APIs, (2) a regressive method coupled with very poor authorisation journeys on the banks’ platforms, (3) technical challenges such as that posed by a lack of immutable transaction IDs’, and (4) the absence of any bank-provided, data rich testing environments." Who will get blamed for this end of the day? The apps trying to build experiences, not the incumbents. But if you don't want to deal with incumbent infrastructure, there is always Bitcoin. 

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Source: Problems in Open Banking, Monzo (current accountsAnnual Report), Coin Telegraph (Binance), Treasury XL (PSD2)