For those looking to disrupt the UK banking market, growth is the new profitability. Despite customer numbers continuing to grow, revenues languish. W
Last year saw significant losses for many of the challenger banks with Revolut and Monzo releasing annual costs of £7.1m and £7.9m respectively. For Monzo this was paired with revenue “as close to zero as to be zero,” according to CEO and co-founder Tom Blomfield.
With both companies exhibiting rapid growth however, funding continues to flow. Revolut recently secured another £50m in funding with Monzo expected to raise a further round in early 2018. “It’s a very well-known phenomenon in online and mobile industries that if you want to get true scale, you invest for growth" according to Index Ventures partner Jan Hammer.
Monzo was valued at £65m in its latest round of funding having raised £35m since its founding in 2015. Its round of £1m in February 2016 was titled the “quickest crowdfunding campaign in history”, taking just 96 seconds to achieve its target. With open accounts increasing at a rate of 5 per cent a week, it has become an issue of scaling operations to keep up.
Revolut’s 700,000 customers are the result of a rapid expansion across Europe that’s fuelled a £300m valuation. Cryptocurrencies and investments are the latest products expected to launch following a recent round of funding, as well as expansion into Asian and North American markets. It is a markedly different strategy from Monzo’s sole-product, UK-focused approach.
In the fintech world, the theory of growth before profitability is not without precedent. TransferWise received £89m in funding over 6 years, posting losses of up to £17m before announcing its first operational profit in May. The online money transfer business is now on track for revenues of £100m in 2017, receiving a $1bn valuation in its latest round of funding. It has unsurprisingly become the flag bearer for the London fintech scene.
Can Monzo and Revolut replicate this success? With both companies forecast to be closing in on one million customers by the end of the year, their growth strategy is certainly on track. Whether they’re able to generate profit from this customer base however is still unclear. They share a vision to become a hub for financial products, a “financial control centre” for your smartphone. In their attempts to achieve this however, their strategies differ markedly, as Etienne Brunet, fintech venture capitalist, says.
By developing their own back-end systems, Monzo have obtained a "competitive advantage compared to others neo-banks. For instance, they’ll be able to integrate more easily with third party applications than others," said Brunet.
Despite causing public technical issues, this is a critical alignment with Monzo’s attempts to become a “financial control centre”. Upon launch, the ease of integration with external third parties will provide customers with one-click access to a broad range of third party financial products - a vital optimisation for a company whose growth can be largely pinned to an unrelenting focus on user experience.
Where Monzo have focused upon technological development, Revolut have looked to international expansion. Now operating in 42 countries, they have raised substantial investment to expand their international presence. Outstripping many of their competitors, they appear well positioned to continue to do so given the correct strategy.
Yet such an international strategy comes with its risks, as Brunet highlights: “It is vital they now have even more robust processes around regulatory requirements such as knowing their customers and anti-money laundering.”
The consequences of failing these requirements could be severe for Revolut, with enforcement actions to date ranging from corporate fines to individual criminal prosecution. For a fledgling company, the reputational impact could also be severe.
According to Mike Baliman, Monzo and Revolut are still to navigate “the very challenging phase of being weaned off never ending VC rounds in favour of finally selling something for more than it costs you to produce it.” Failure to achieve this will leave their value consisting solely of their ability to sell their mass of loyal clients.
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