Rapidly growing costs combined with lackluster lending has left Monzo vulnerable to investor nerves and a potential buyout.

Having recently released its 2020 annual report, talk about Monzo has quickly turned into questions regarding the bank’s continued ability to exist.

It has struggled with a multitude of factors, including low deposits per customer – now £357 ($464) – a botched premium account launch, and weak lending potential. The latter is most important, as having to rely on unsecured lending rather than mortgages has stopped the bank from developing a secure income stream from its large customer base.

The financial pain this causes can best be seen in Monzo’s cost-to-income ratio. As of February 2020, this stands at 424%, meaning the bank currently produces income to satisfy just 24% of its costs. And although this is an improvement on last year’s 664%, it shows that Monzo is nowhere near its goal of reaching profitability and will have to continue burning through investor capital for much longer than was previously thought.

The problem 

Part of the problem has been Monzo’s decision to pursue customer growth over everything else, including developing a full product line. In Monzo’s case, customer numbers have been more visible than tangible, helping to secure new investor funds but being less beneficial for revenue.

The result of acquiring 4.3 million new customers has been substantially rising costs, including a growth in staff numbers from 300 in 2018 to almost 1,500 in 2020. When compared to Tandem – a digital rival that has a full product line, is very close to profitability, but has yet to hire 300 staff – it shows that Monzo’s overexpansion is unsustainable.

As well as personnel, Monzo has also seen rising costs from “other operating expenses”. This is likely to derive from third-party development, which while helping Monzo to grow quickly, has also led to considerably higher costs for the bank this year.

On top of this grim news for Monzo comes coronavirus. Unlike most banks, the majority of Monzo’s net operating income derives from interchange fees and product commission. This is likely to have taken a serious hit since February with Covid-19 causing a fall in spending and subsequently Monzo’s interchange income.

Despite this, Monzo’s strong brand means the bank is unlikely to be forgotten. Monzo still boasts a net promoter score of 75, head and shoulders above its competitors, and in 2019 alone, it won nine awards. In a worst-case scenario, it would likely be bought out by a rival and continue to operate as an independent subsidiary.

Yet, to stay alive for now, Monzo should review its customer numbers strategy, as there is little point attracting so many customers if it can’t generate revenue from them. While a 180-degree turn is unlikely, Monzo should cut costs where it can, while focusing its resources towards developing a broader product line that will help generate a more sustainable bank for the future.