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The short answer is that they don't really. UK retail banking is notoriously low margin, and all of the major banks struggle to make anything from their consume

The short answer is that they don't really. UK retail banking is notoriously low margin, and all of the major banks struggle to make anything from their consumer businesses. Charging for bank accounts is not something the UK market accepts. They'll likely cover costs in the long term, and their business banking will probably do fine, but I suspect the valuations aren't justified. The main way that the major players make money is through things like mortgages, wealth management for the very wealthy, and through their investment banking arms. Starling is another startup bank, a main competitor to Monzo. While they're decidedly less "cool", they seem to have targeted business banking much more, and I suspect that's why they're now in a better position. Monzo went big on Monzo Plus and even on its ~3rd? iteration, it seems to have had a lacklustre reception. I'm Monzo user #13, about as onboard with the idea as I could be, and I find it unconvincing. Monzo have just launched Monzo Flex, an easy payment system like AfterPay/ClearPay/Klarna. I'd normally expect that to do well but it's about 2 years too late and going into a recession is probably not the right time. Hopefully it'll do well as we come out.

Nextgrid 4y ago
Starling makes money from business accounts (they pocket the interest on those, and that interest amounts to more considering business accounts keep a larger balance) and I believe also provides services to other payment companies, essentially SaaS-ing their tech. It's a shame because this is something that Monzo could've done just as well and there's absolutely a place (well, was - that's now taken by Starling) in the market for it. Natwest still charges extra for a "next-gen" business account that allows multi-user access to a web UI, and I bet it's terrible - this is something a company can Monzo could've built in days based on their existing modern tech at a time where there was nothing like it in the market.
- danpalmer 4y ago
  Monzo do have good tech, but I've also heard that there is a "surprising amount of legacy tech" there as well. I'd interpret that as either they do too many re-writes of things, and/or they're perhaps not building at the level of quality that they should have been. They have some excellent engineers in the early team, but I've also seen a lot of very inexperienced people go there, so that in combination with a "move fast" mentality, will likely result in a lot of codebase issues and churn. Starling seem to have taken a "slow and steady wins the race" sort of approach, and had a bunch of experienced engineers build a boring old Java app. Nothing special but I'm not surprised that it is working out ok in the long run.
  - raesene9 4y ago
    I've noticed that about Monzo. They were very early adopters of Kubernetes amongst other things, which surprised me as early Kubernetes was not exactly secure... Having seen some presentations about their tech. stack, it seems very clever and has interesting ideas, but I was worried that once the people who designed it had moved on , how maintainable would it be (coming from a banking background where I found that systems lived on for EVAR)
  - nicoburns 4y ago
    Monzo seems to have gone all-in on microservices (they have thousands apparently), which sounds like an absolute nightmare.
    - Nextgrid 4y ago
      Yes that is one of my concerns with their tech stack. The management overhead of that must be insane.
    - andrewingram 4y ago
      One of their earliest engineers was apparently a bit of a microservices guru, so there's a good chance that at least they did it well, in terms of mitigating the litany of common issues. Though I'm still skeptical as to whether it was actually a good idea.
- dbbk 4y ago
  Monzo does have business accounts... I have one. It's great.
  - Nextgrid 4y ago
    They have them now, long after Starling ate their lunch - my point was that they could've offered them before Starling and probably made a killing (it would've been the only option for a modern business bank account in the market back in those days).
user_named 4y ago
I find it hard to believe that they struggle to make money off bank accounts. It's an intentional top of funnel strategy to offer free accounts.
- Nextgrid 4y ago
  > I find it hard to believe that they struggle to make money off bank accounts. Why is that? Current accounts are a loss-leader for most (all?) legacy banks too, they're used to lure the customer in so they can then pitch revenue-generating products such as credit cards or mortgages.
- 55555 4y ago
  Go look up how much money they have in deposits. When I checked in 2017/18 they had like 87mm USD total. That’s a single UHNW account at a “real” bank. Maybe it would earn 1-2mm in annual profits from AUM to cover a dozen staff? Idk I’m not an expert.
  - ascorbic 4y ago
    £4.4 billion in Feb, so about 6bn USD. https://www.statista.com/statistics/1118161/customer-loans-and-deposits-for-monzo-bank-united-kingdom/ https://www.statista.com/statistics/1118161/customer-loans-a...
- danpalmer 4y ago
  UK banks work to an expectation of 0-3% margin. In Monzo's favour is that they don't have to operate a branch network, but then again they are small compared to the high street banks. There's just not a lot of money available in accounts, even accounting for using it for lending etc. Also bear in mind that while they can use deposits to fund some amount of lending, the amount they have to keep on hand, collateral, insurance (not sure if it's called that) with the Bank of England, etc, are all very heavily regulated so that they can't mess it up, which conversely means it's much harder to monetise than expected based on a basic understanding of fractional reserve banking.
stephen_g 4y ago
Do they lend? That’s where basically all of a bank’s profits come from, deposits are just there mostly as low-cost liquidity (and because creating deposits and the flows of inter-bank transfers are all part of enabling lending to happen). So I’m always surprised that lending and credit isn’t the core strategy of these banks - there’s very little money to be made in fees…
- Nextgrid 4y ago
  They are very conservative with their lending. They do lend, but not much (relatively speaking), and in any case I'm not sure lending alone will satisfy their investor's expectations.
- danpalmer 4y ago
  There's not even that much to be made in most lending (by transactions). Lending through overdrafts doesn't make a lot as it's typically lending to customers who are least able to afford it. Mortgages and credit cards are the big ones, and Monzo does neither. However I would like to see a credit card from Monzo.
  - madeofpalk 4y ago
    Monzo does have Buy Now Pay Later now, for whatever that's worth.
nly 4y ago
I see plenty of people with blue Monzo+ cards. I think since app dominated baking became a thing a lot more people are paying for premium accounts. Imho they all offer poor value for money though
- hwntw 4y ago
  That might be highly location specific as well - ie, clustered around wealthy urban areas such as London. In Wales I've never seen such a card (although, certainly more than a few coral cards around!) Probably quite easy to saturate that market.
blibble 4y ago
> The short answer is that they don't really. UK retail banking is notoriously low margin, and all of the major banks struggle to make anything from their consumer businesses. I do wonder why the VCs wanted into this market at all intense competition snuffed out the margins of retail banking 30 years ago and the "legacy" (read: profitable) banks are more that capable of putting together a shiny looking app

Nextgrid 4y ago

Starling makes money from business accounts (they pocket the interest on those, and that interest amounts to more considering business accounts keep a larger balance) and I believe also provides services to other payment companies, essentially SaaS-ing their tech. It's a shame because this is something that Monzo could've done just as well and there's absolutely a place (well, was - that's now taken by Starling) in the market for it. Natwest still charges extra for a "next-gen" business account that allows multi-user access to a web UI, and I bet it's terrible - this is something a company can Monzo could've built in days based on their existing modern tech at a time where there was nothing like it in the market.

danpalmer 4y ago
Monzo do have good tech, but I've also heard that there is a "surprising amount of legacy tech" there as well. I'd interpret that as either they do too many re-writes of things, and/or they're perhaps not building at the level of quality that they should have been. They have some excellent engineers in the early team, but I've also seen a lot of very inexperienced people go there, so that in combination with a "move fast" mentality, will likely result in a lot of codebase issues and churn. Starling seem to have taken a "slow and steady wins the race" sort of approach, and had a bunch of experienced engineers build a boring old Java app. Nothing special but I'm not surprised that it is working out ok in the long run.
- raesene9 4y ago
  I've noticed that about Monzo. They were very early adopters of Kubernetes amongst other things, which surprised me as early Kubernetes was not exactly secure... Having seen some presentations about their tech. stack, it seems very clever and has interesting ideas, but I was worried that once the people who designed it had moved on , how maintainable would it be (coming from a banking background where I found that systems lived on for EVAR)
- nicoburns 4y ago
  Monzo seems to have gone all-in on microservices (they have thousands apparently), which sounds like an absolute nightmare.
  - Nextgrid 4y ago
    Yes that is one of my concerns with their tech stack. The management overhead of that must be insane.
  - andrewingram 4y ago
    One of their earliest engineers was apparently a bit of a microservices guru, so there's a good chance that at least they did it well, in terms of mitigating the litany of common issues. Though I'm still skeptical as to whether it was actually a good idea.
dbbk 4y ago
Monzo does have business accounts... I have one. It's great.
- Nextgrid 4y ago
  They have them now, long after Starling ate their lunch - my point was that they could've offered them before Starling and probably made a killing (it would've been the only option for a modern business bank account in the market back in those days).

user_named 4y ago

I find it hard to believe that they struggle to make money off bank accounts. It's an intentional top of funnel strategy to offer free accounts.

Nextgrid 4y ago
> I find it hard to believe that they struggle to make money off bank accounts. Why is that? Current accounts are a loss-leader for most (all?) legacy banks too, they're used to lure the customer in so they can then pitch revenue-generating products such as credit cards or mortgages.
55555 4y ago
Go look up how much money they have in deposits. When I checked in 2017/18 they had like 87mm USD total. That’s a single UHNW account at a “real” bank. Maybe it would earn 1-2mm in annual profits from AUM to cover a dozen staff? Idk I’m not an expert.
- ascorbic 4y ago
  £4.4 billion in Feb, so about 6bn USD. https://www.statista.com/statistics/1118161/customer-loans-and-deposits-for-monzo-bank-united-kingdom/ https://www.statista.com/statistics/1118161/customer-loans-a...
danpalmer 4y ago
UK banks work to an expectation of 0-3% margin. In Monzo's favour is that they don't have to operate a branch network, but then again they are small compared to the high street banks. There's just not a lot of money available in accounts, even accounting for using it for lending etc. Also bear in mind that while they can use deposits to fund some amount of lending, the amount they have to keep on hand, collateral, insurance (not sure if it's called that) with the Bank of England, etc, are all very heavily regulated so that they can't mess it up, which conversely means it's much harder to monetise than expected based on a basic understanding of fractional reserve banking.

stephen_g 4y ago

Do they lend? That’s where basically all of a bank’s profits come from, deposits are just there mostly as low-cost liquidity (and because creating deposits and the flows of inter-bank transfers are all part of enabling lending to happen). So I’m always surprised that lending and credit isn’t the core strategy of these banks - there’s very little money to be made in fees…

Nextgrid 4y ago
They are very conservative with their lending. They do lend, but not much (relatively speaking), and in any case I'm not sure lending alone will satisfy their investor's expectations.
danpalmer 4y ago
There's not even that much to be made in most lending (by transactions). Lending through overdrafts doesn't make a lot as it's typically lending to customers who are least able to afford it. Mortgages and credit cards are the big ones, and Monzo does neither. However I would like to see a credit card from Monzo.
- madeofpalk 4y ago
  Monzo does have Buy Now Pay Later now, for whatever that's worth.

nly 4y ago

I see plenty of people with blue Monzo+ cards. I think since app dominated baking became a thing a lot more people are paying for premium accounts. Imho they all offer poor value for money though

hwntw 4y ago
That might be highly location specific as well - ie, clustered around wealthy urban areas such as London. In Wales I've never seen such a card (although, certainly more than a few coral cards around!) Probably quite easy to saturate that market.

blibble 4y ago

> The short answer is that they don't really. UK retail banking is notoriously low margin, and all of the major banks struggle to make anything from their consumer businesses. I do wonder why the VCs wanted into this market at all intense competition snuffed out the margins of retail banking 30 years ago and the "legacy" (read: profitable) banks are more that capable of putting together a shiny looking app