Monzo Bank achieves profitability despite a tougher funding environment

British digital bank Monzo has become the latest in a string of challenger banks and fintech companies to become profitable after nearly a decade of venture-backed expansion, a sign that the sector is prioritizing profitability over growth.

Monzo achieved pre-tax profits of £15.4 million for the financial year ending March 2024, marking the first full year of profitability in its nine-year history. Gross revenues rose by two and a half times to £880 million. Customer deposits grew by 88 percent to £11.2 billion, with more than 500,000 customers now subscribing to Monzo Plus and Monzo Premium accounts. Average revenue per user for personal customers is now £145 (up from £112 in FY2023) and for business customers is £502 (up from £404 in FY2023).

Last year, Monzo reported a loss of $116.3 million for the 2023 financial year.

“The rising cost of money – interest rates – has made it harder for startups to focus on growth without considering short-term profitability as it has become harder to raise funds,” says Ben Marrel , CEO of the British venture capital firm. Bree. “Paradoxically, high interest rates also mean more revenue for neobanks, as they make money from deposits.”

However, Marrel described Monzo as a “beacon” that could serve “to reassure venture capital funds that have previously been hesitant to invest in bold fintechs.”

Monzo’s rival British bank Starling reported its first full year of profitability in 2022 with pre-tax profits of £32.1 million for the financial year ending March 31, 2022.

SMB-focused neobank OakNorth has reported profits every year since 2015. Meanwhile, Zopa, the British digital bank backed by SoftBank, also reported profits this year, raising speculation that it will soon list.

“Ultimately, a focus on good profits and good business models (…) is important because the financing cycle always comes to an end,” says Jaidev Janardana, CEO of Zopa Bank. “As a company you have to create more value than it costs to do business, otherwise what’s the point of doing business.”

Nina Mohanty, founder and CEO of Bloom Money, also highlighted the impact Monzo’s profits will have on the wider UK fintech ecosystem.

“It has been a difficult landscape for B2C fintechs, with investment frozen in the wake of the pandemic and many questioning the ability of these companies to compete with incumbent providers,” she said. “However, Monzo’s profitability and confidence in its future ambitions should be a clear signal to investors that it is possible. It may take some time, but as long as the industry remains courageous and continues to innovate for the benefit of its customers, the future looks bright. It is a very positive milestone for British fintech.”

Kebbie Sebastian, founder and CEO of fintech Merge, also considered this news a “milestone” for both the company and the UK.

It shows that great customer experience and profits are not mutually exclusive in banking

Kebbie Sebastian, founder and CEO of Merge

“It shows that great customer experience and profits are not mutually exclusive in banking – and it signals a broader trend of digital banks becoming financially sustainable entities, able to compete with traditional banks on both service quality and financial performance, but without compromising the promise of fintech. of innovation and customer focus,” he added.

In the annual report, Monzo CEO TS Anil framed the bank’s results against the backdrop of “challenging external conditions” such as a “volatile” macroeconomic environment in which geopolitical instability is eroding global confidence and a “cost crisis” of livelihood’ in the economy. Britain is “far from over”.

The bank’s loan portfolio, which includes overdrafts, unsecured loans and the “buy now, pay later” Monzo Flex credit card, grew by 84 percent. However, provisions for expected credit losses also rose 76 percent to £176.9 million. Monzo said it expects this to continue to grow as the business grows and some customers face economic challenges and fall into payment arrears.

Operating expenses also increased by 51 percent to support what the bank described as strategically expanded marketing spend, growing brand awareness and capturing customer growth opportunities.

The bank now claims to be the seventh largest bank in Britain by customer numbers, with one in six adults in the country having an account. Monzo added 2.3 million customers in fiscal 2024, including 200,000 business customers, with a total of 9.7 million accounts.

It says it has started offering products to “politically exposed persons,” a term used in financial regulation to describe government officials exposed to higher risks of bribery and corruption. Chancellor Jeremy Hunt said last year that Monzo had rejected his account application. Monzo also said it was notified in November 2023 and that the Financial Conduct Authority was no longer assessing its criminal liability in relation to the bank’s compliance with money laundering regulations, although a civil investigation would continue.

Monzo has also made progress on its goal of closing the gender pay gap this year, with the bank’s median gap shrinking from 9.3 percent to 8.1 percent, Anil said.

“There is always more work to do here and this will remain a focus as we scale,” he added in the annual report. “On boards of directors and the executive committee, women hold 44 percent of positions, and 28 percent are held by people of color. In technology leadership roles, we have seen the share of women increase to 22.5 percent (up from 15.2 percent in FY 2023), which is progress in an unbalanced industry.”

Meanwhile, Monzo continued with its plan to expand into the US market, but also into Europe. The bank is in the early stages of setting up an office in Dublin, Ireland, which will serve as a European gateway.

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