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5 things we learnt from Monzo’s 2023 Annual Report

Monzo’s numbers are in. But what is actually happening under the hood? We read the neobank's 163 page annual report to find out.

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The first six months of 2023 have brought a welcome bout of profitability to the UK’s digital banks. 

Revolut, Starling and Tandem for example have said they are now operating at a profitable level. 

Monzo, which this week released its annual report, joined the club too.

In this article, we take a look at five things we learned about the business from the report. Most of the figures concern the twelve months from 1 April 2022 to the end of March 2023.

Profits are here

Officially, Monzo actually reported a loss of £116.3m for the year up to March 2023, a fall of just 2 per cent, for the twelve months up to March 2022.

But the word 'profit' or 'profitability' popped up 20 times or so with both TS Anil, the bank’s CEO, and Gary Hoffman, the chair of the board of directors, making it the central part of the commentary. 

"Since closing our FY2023 audited accounts in February, we’ve continued on our trajectory of strong customer and revenue growth and we’ve now reached profitability," Anil said.

"In just eight years we’ve grown from a startup to not just the UK’s leading digital bank, but the 7th largest UK bank by customer numbers, with more than 10 per cent of the UK population choosing to bank with Monzo. And there’s so much more to come," he added.

Monzo now says it is profitable on a monthly basis.

"Our losses remained large this year, which was expected as we continued to invest and grow our business, resulting in higher costs. But we’ve seen the benefits of this investment throughout FY2023 as revenues grew significantly and I’m thrilled that since the end of our audited financial year, this momentum has continued and we’ve reached profitability," said Hoffman.

"This will power the further investments we’re going to make to fuel our ambitions at home and abroad and to make money work for everyone," he added.

Marketing and tech spend is soaring

Monzo once prided itself on not doing any direct marketing but still seeing incredible growth thanks to evangelising from its early adopters and the visual prominence of its flashy, eye-catching hot coral cards. 

Now marketing is being ramped up. Big time. Two years ago Monzo was spending £0.5m on marketing which then jumped 600 per cent.

Monzo’s marketing spend for this year jumped from £3.6m last year to £21.7m, another 500 per cent jump in marketing.

This huge increase in marketing spend including a brand refresh in October and the use of digital platforms such as TikTok to ‘introduce’ more customers to Monzo

“We launched our first ever Monzo Flex advertising campaign and welcomed more than 400,000 customers to the product. Customers continue to recommend us to their friends through our ‘Give £5, Get £5’ campaign, with an average of 14 per cent of our customer growth coming from referrals.“

Monzo’s leadership seems happy with the return on the higher costs though, with a plan to continue over the next 12 months to invest in marketing “to make sure existing and potential customers are aware of how they can manage their money better with Monzo.”

Monzo Business, rather than its consumer side, receiving a much greater focus.

Customer growth

Monzo says it now has 7.5 million customers for the period covered. This, according to the report, represents an increase from 5.8 million compared with the end of March 2022 or a 1.7 million jump. 

While in absolute terms, this is likely to be Monzo's best-ever year in terms of adding new customers, as a percentage increase or a rate of growth it is infact faster than last year.

Monzo’s rate of growth in new customers was 20.8 per cent vs this year’s 27.6 per cent.

Interesting word of mouth is becoming less important to drive customer acquisition.

Last year 90 per cent of the new customers were coming from organic growth. This year that has stalled to 66 per cent. 

This is still incredible in the great grand scheme of things and validation of its marketing costs increasing.

Monzo's customers are becoming more trusting

Customers are growing in number at 27.6 per cent per annum, as the last section covered. 

But Monzo also saw deposits and card spending grow by a larger amount, suggesting people are becoming more keen to use their cards more frequently and trust a digital bank with larger sums. 

Monzo saw card spending leap 38 per cent over the year to £33.6bn, up from £24.4bn. 

This helped increase transaction income by £48.1m.

Customer deposits jumped 34 per cent to £6bn, up from £4.4bn. Half of these deposits (49 per cent) are held on demand with the Bank of England with almost all the rest invested in what Monzo chief financial officer James Davies calls “high-quality liquid assets”.

Davies emphasises, while not directly mentioning Silicon Valley Bank, that hedging is short duration and he and the Monzo finance team are being increasingly vigilant., 

“These [“high quality liquid assets”]help us maximise the return we earn while making sure appropriate hedging is always in place.

"The average tenure of our investment portfolio is 1.4 years. Going into FY2024, our Treasury Policy, processes and systems are evolving at pace to make sure that we continue to safely strengthen our balance sheet management while maximising the opportunity in this area.“

Lending is growing…from a low base

Monzo has been slow to launch lending products when compared with peers. Taking a cautious approach might be another way of putting it. 

Lending after all though, as CEO TS Anil who cut his teeth at Capital One knows well, is where the big money is made in banking.

In the report, Monzo says it increased significantly over the year with total lending increasing by 194 per cent to £759.7m, a £500m increase from the £260m in FY2022.

This is split across overdrafts, unsecured personal loans and our growing Monzo Flex product. 

Borrowing available to customers on overdrafts and Monzo Flex ( i.e undrawn balances) also increased £553.4m, to £921.9m. 

“Adoption of all three products has increased throughout the year as customers become more engaged and take advantage of the wider range of products we offer. Growth in our lending portfolio does lead to an increase in our credit loss expense and growth in impairment loss allowance on our balance sheet, both of which have reduced our Common Equity Tier 1 capital (CET1) ratio, ”the report said.

Monzo emphasises though that it is still taking a “conservative approach to credit risk management”.

Credit loss expenses have increased to £101.2m, a £87.2m increase from £14.0m in FY2022, a 620 per cent increase.

Credit loss expense is the actual amount lost to ‘bad debt’ but rather the amount banks put aside to cover the Expected Credit Loss forecast lost when customers can’t repay what they’ve borrowed.

“This increase in lending has driven the majority of the credit loss expense. We’ve not yet seen an increase in customers going into arrears or struggling to pay us back, due to the cost of living crisis and current economic uncertainty, but we’ve adjusted our models to take into account higher expectations of loss.”

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