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September 3, 2019

Business Model Canvas – Monzo

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#Fintech Monzo

Monzo is a UK-based, digital-only Challenger Bank – one of the fastest-growing among Revolut N26 and others. 3 in every 100 people in the UK use Monzo, and with a US launch on the horizon, it’s time to analyze how Monzo’s strategy translates into top and bottom-line growth using the Business Model Canvas!

How does Monzo make money?

The 1st question is, is Monzo a bank?

Technically the answer is yes, given that they have had their UK Banking License since Q2 2017. But practically speaking, they don’t operate like a traditional bank. They are a ‘Challenger Bank‘ operating at the margins between an online Chequing/Savings accounts and a virtual financial planner. And while traditional banks have a hybrid between bricks-and-mortar branches and online services, Challenger Banks are digital-only.

Traditional banks make the bulk of their money by underwriting mortgages, commercial loans, and lines of credit, pocketing the NIM (Net Interest Margin) between the cost to borrow versus lend out. Challenger Banks like Monzo do not. Monzo has 3 current revenue streams:

  • Offering Premium Accounts – Monzo Plus – ranging from £4.95 – £12 per month on 6-12 month contracts, which comes with benefits such as travel insurance, etc depending on the package you select
  • Providing Overdraft Protection to customers for a small monthly surcharge (50p) up to a max of £15.50 per month
  • Creating interest-bearing Savings/ISA Accounts with OakNorth Bank where Monzo pockets 30-40 bps depending on the product

*They recently put the brakes on plans to launch Business accounts (which competitors like Revolut already have) due to losing out a grant, but will undoubtedly have those in the future.

Clearly, Monzo has been growing like wildfire since their inception. Similar to other Challenger Banks (+ N26 Business Model & Revolut Business Model) they are not profitable, instead preferring to maintain hockey-stick level growth and charting a ‘future path’ to profitability.

Community-Centric or Commercial-Partner Strategy?

Monzo is a hybrid between a community-centric and a commercial-partner strategy. Similar to UK-based Revolut, they launched using an equity crowdfunding campaign and have built a significant following in their forum Monzo Community. But in other ways, they are more like N26, deciding to strategically source out partners in other niches (ie. Oak North) and markets (ie. US Market Entry).

The bank started as a pre-paid debit card. The team generated hype for its sleek app with a lengthy waitlist, and that whiff of exclusivity operated as a cunning customer lure. Wannabe customers could jump an initially lengthy queue if friends granted them one of their few “golden tickets”. Demand swelled, allowing Monzo to grow its user base exponentially despite spending virtually no cash on marketing up until this year.

Guardian

Monzo’s original equity crowdfunding campaign in Q1 2016 was syndicated with Passion Capital and subscribed for £1mn in under 2 minutes! In Q1 of 2017, they launched a 2nd equity crowdfunding campaign, which was once again oversubscribed to the tune of £12mn. Then in Q4 2018, they launched yet another equity crowdfunding campaign, raising £20mn from ~36,000 customers in a matter of hours. In this light, we can see that the equity crowdfunding creates a ‘Growth Flywheel’ of sorts, as the funds come from customers themselves, creating engagement, feedback loops and funds to expand all at once.

But Monzo has also been active on the partnership front. Partnering with other UK-based ‘Challenger Bank’ OakNorth has allowed Monzo to expand into the league of ‘banks’ by generating revenue off interest rates, in this case, 0.30-0.40% through this partnership with OakNorth Bank. They are also taking the partnership route in their planned expansion into the US, but will not offer lending to US customers, instead focusing mostly on in-app features around spending, savings, and payments.

Part of Monzo’s explosive growth has been linked to their highly-rated Customer Support. This is another area where they may have to partner, as they recently had job ads on LinkedIn for Customer Support positions in Las Vegas. Understanding and adapting to local-market conditions will likely be essential for long-term success as a global bank.

Fundraising and Valuation

Monzo’s most-recent fundraising round in Q2 2019 valued the company at $2.5bn USD with a $144mn investment from a group of investors led by Y-Combinator. The valuation is similar to that of other hyper-growth Challenger Banks.

The branchless bank is now making £4 on each customer it signs up to the platform, versus a £15 loss per customer last year, according to a company spokesperson.

CNBC – Monzo doubles valuation

Similar to its peers, Monzo is comfortably operating at a loss (£33mn in 2018) with a strategy of expanding its footprint in the global market before focusing on profitability.

“Getting to profitability is not a goal we are prioritising over delivering customers real value. If that takes 10 years, we are committed to it.”

CEO Tom Blomfield, The Guardian

The company currently has more than 1,000 staff, but will likely continue to need to add significant headcount as it rolls out to new markets and deals with increased competition.

Monzo Business Model Canvas

A business model is defined as:

“the rationale of how an organization creates, delivers and captures value.”

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

Explained - components of the canvas
Business Model Canvas - Index

Value Proposition

A new Marketplace-Model of Digital Banking

  • Core app helps users save money, manage budgets, easy transfers
  • Offers Savings/ISA accounts, travel insurance and other services via Partnership
  • Top-notch customer support
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