There’s something about Monzo – particularly so if you are of a certain vintage. At a recent meeting with clients, all of whom were relatively young, I was talking on the subject of banks and disruption – and, while I suspect they may not have been fully engaged at the start, they certainly were as soon as I mentioned the name of the British digital bank with the vibrantly distinctive coral-pink debit card.
There is no denying the bank is extremely user-friendly but again, if you are of a certain vintage, you think your Monzo card is at the cutting edge of design; if you are a little older, you may find yourself wishing you had remembered your sunglasses whenever you make a transaction. Nor is this the only area where Monzo appears to be splitting opinion – although this time it seems less likely to have anything to do with age.
In June, for example, it emerged that Monzo had, in the space of just eight months, doubled its valuation to a little over £2bn. According to this Financial Times article, the £113m attracted in the latest round of fund-raising is to be used to support the bank’s growth in the US, where it launched earlier this month, and to develop new products “to move it closer to sustainability”.
That last point seems crucial to us, here on The Value Perspective, because while Monzo has been no slouch at signing up new customers – according to the FT, it is on track to attract 250,000 this month and has more than two million overall – it has so far proved less adept at generating profits. In the 12 months to February 2018, the most recent year for which data is available, the bank made a pre-tax loss of £33.1m.
At that £2bn valuation, Monzo is, after TransferWise, comfortably the second largest fintech in the UK – not to mention well over the $1bn (£789m) threshold that confers unlisted technology businesses with ‘unicorn’ status. Indeed, Monzo was one of a number of UK-based unicorns we mentioned in Think hard as looking “well on their way to being household names – indeed some, at least for certain generations, already are”.
Of course, the UK banking sector already has more than its fair share of household names – businesses that are pretty easy to understand in theory and hugely complex to run in practice. And two of the ingredients that make them so complex are the regulations to which they must adhere and the information technology support they require to keep them – and their customers – safe.
In that context, we were interested to read how Monzo recently had to warn almost half a million customers to change their pins after uncovering a potential security flaw. Such episodes clearly illustrate how crucial it is that more established banks continue to shoulder their heavy regulatory and IT burdens – requiring major investments of capital that, even so, do not appear to have prevented them generating real cash profits.
Here on The Value Perspective, we do appreciate the very appeal of the likes of Monzo and other fintech businesses to some investors is that they do not have to deal with all the legacy issues that affect the wider market’s perception of more traditional UK retail banks. Nevertheless, we continue to believe such issues are largely under control – and, in certain cases, more than acceptably compensated for by solid balance sheets, attractive yields and profits (not just valuations) that can be measured in the billions.