Monzo’s numbers are in. But what do they mean? We read the neobank's 185 page annual report to find out.
Neobanking, despite what the name might suggest, is not that new.
You can argue, in fact, that it is in its tenth year as a trend. A decade of digital banking disruption.
Today in 2022, neobanking is on the cusp of being not just a loss-making, venture-backed and avante garde area of financial services but instead a potentially profitable and sustainable market with high growth and margins.
These are at least some of the learnings from Monzo’s annual report, which was published at the end of last week.
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 2021 to the end of March 2022.
First up, what’s happening with Monzo’s bottom line?
For the year ending March 2022, Monzo clocked up a loss of £119m compared with c.£130m the previous year. On the face of it good news. A decreasing gap between costs and revenue means it is on a path to profitability. Although, this comparison includes ‘non-recurring items. If you take out these one-off costs, it is a slightly different story.
Focusing on recurring costs-only, Monzo’s losses actually went up by c.£3m for the year from £116.2m in the year ending March 2021 to £119m for the latest figures.
While losses were broadly steady overall, revenue soared 92 per cent to £154m accompanied by 30 per cent higher costs mainly owing to hiring c.600 new staff members, increasing its marketing spend (more on that later) and costs associated with having higher customer volumes (also more on that later).
An interesting extra nugget of information reported by Monzo was that it is currently, according to June 2022’s revenue figures, heading for further substantial growth in revenue. June’s numbers suggest an annual revenue run rate of £270m.
This would suggest the bank may be close to a breakeven point if it wishes and can keep costs under control.
Monzo says it now has 5.8 million customers for the period covered. This, according to the report represents an increase of one million compared with the end of March 2021.
Notwithstanding a slight discrepancy in these numbers - Monzo said in its annual report last year it had five million customers rather than the 4.8 million implied by the figure of one million higher customers it has reported this year, it is safe to say customer growth is broadly steady in absolute terms while also slowing in percentage growth.
Between March 2019 and March 2020, Monzo increased customer accounts by two million. For the next two twelve month periods, the figure has stood at roughly one million per year. This shows increasing its customer numbers is becoming harder but still impressively fast at c.100,000 new customers per month.
This growth is adding to its cost base. Monzo says its current account operating costs increased to £41.5m, from £33.1m compared with the previous year. This is slightly higher in percentage terms than its customer growth rate, c.25 per cent vs 21 per cent.
Might this be to do with the complexity of scale?
“Frustratingly, UK customers have continued to suffer as criminals have found new ways to defraud them,” the report said.
In compensating customers who’ve fallen victim to financial crime, Monzo’s cost rose £16m, up 32 per cent from the previous year.
The company’s technology costs also grew substantially from £3.5m to £17.9m as it served an average of 5.1m customers, up from 4.4m the year before.
Regardless, Monzo’s average customer seems to be more valuable to its bottom line with one million customers using Monzo as their “main bank”, whatever that means. Monzo customers are using their cards more and becoming more comfortable with keeping larger deposits at the bank and/or attracting customers with more money.
The bank saw a 42 per cent increase in customer deposits from £3.1bn to 4.4bn helping interest income to increase 58 per cent though a big boost to its lending.
Monzo has seen gross lending, the total value of loans and advances to customers excluding expected credit losses, increase by £154m to £259m compared to £105m last year.
The bank has more than doubled the number of customers it lends as well as launched its Klarna rival Monzo Flex. This has increased its expected credit losses, however, following a significant increase in its lending book.
Monzo Flex was launched half way through the reporting period in September 2021. It offers the option to spread the cost of purchases over time including interest free option for short terms.
Customers can spread the cost of purchases over three monthly instalments interest-free, or over 6 or 12 months but this bares interest.
“We pride ourselves on offering customers a transparent and flexible way to borrow money that helps them to feel in control at all times. Our ambition is now to make Monzo Flex available to everyone, including non-Monzo customers” the report said.
Monzo added one million customers in the full year to March 2022, with 90 per cent of this coming from organic growth. However, the company - which once prided itself on doing not £1 of paid marketing has started to spend its cash.
In the year Monzo started paid marketing, ran several advertising campaigns including painting a fleet of London buses in its hot coral signature colour. It also re-launch its ‘Give £5, Get £5’ campaign in January 2022.
Overall, this meant an increase in marketing spend of £3.1m, up from £0.5m, or a 600 per cent growth rate.
If that leap is not all, TS Anil, CEO of Monzo, says the company is planning to ramp things up even further on the marketing front.
“In the UK, we plan to invest further in our current products. Having benefited from huge organic growth and word of mouth to date, we’re now ready to go out with an exciting marketing strategy that will introduce even more people to Monzo,” he said.
Subscriptions have long been known to the banking world but neobanks are particularly excited about the repeat revenues that they could bring at low marginal costs.
Good news then for Monzo. It saw subscription income quadruple by March 2022 compared with the previous year with net fee and commission income also increasing by 93 per cent.
Sadly, Monzo doesn’t break down exactly how many subscribers it has. Up to the end of June, Monzo says it has 430,000 of its customers or about 8 per cent across its Plus, Premium and business verticals.
The only problem is, that the business figure includes all business accounts i.e. Business Pro and Business Lite. The latter is free, the former is paid for.
Nonetheless, subscribers are clearly growing fast.
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