Challenger bank Monzo taps investors for £60 million
The new funding round means that Monzo has raised a total of £125 million since the economy nosedived back in March. We look at how the firm has utilized its venture capital
British challenger bank Monzo has returned to the market for additional funding.
The fast-growing start up which now has an estimated 4.8 million customers secured £60 million in fresh funding and was able to price the issue at the same level at which it was funded by investors back in June this year.
That puts a theoretical value on the business of £1.24 billion, which is rather less than the £2 billion that was being talked about back in the summer.
The latest tranche of money came from a series of new backers that included Novator, a UK based tech investor which has previously put money into Deliveroo and Stripe. Other new investors included Kaiser and TED Global. They have joined the likes of Y-combinator, General Catalyst and Stripe on Monzo’s roster of backers.
The new funding round means that Monzo has raised a total of £125 million since the economy nosedived back in March. How have they been deploying that money?
Well, Monzo pointed to what it called strong organic growth with overall customer numbers on the way to 5 million, and business account holders now number 60,000 which is an increase of 35,000 since June. Monzo has also seen a bigger take up of paid for current accounts, of which it now has more than 100,000.
Monzo claims to be the bank that more people are switching to in the UK than any other which it attributes to high levels of customer service, a category in which it has been ranked number 1 in the UK.
However, the bank was forced to furlough staff earlier in the year and to make 80 employees redundant during the summer, when it also closed it Las Vegas-based customer support centre.
What effect those changes will have on levels of customer satisfaction remains to be seen.
Banking may be the proverbial license to print money but Pareto’s law can still apply here. The rule states that 80% of your business will come from 20% of your customers.
Whether that 20% currently reside within the Monzo client base is a matter of debate. Winning market share based on numbers of customers may not actually be beneficial if those customers generate little or no revenue, or worse still become a cost to the business.
Challenger banks do not have the legacy issues or overheads of their established and incumbent peers, but the returns from banking in the UK are becoming ever more commoditised.
Research by Statista.com estimated the current return on equity or ROE available to UK banks to be just +2.7%, whilst in Germany, that figure fell to +0.90% and for Spain, the number was actually negative.
Venture capital and private equity funding will carry the challenger banks so far but at some point, they will need to start making profits, or least generate a return on equity that is higher than their cost of capital. Though of course, that is a challenge faced by the whole banking industry
There were rumours last week that Spains Sabadell was considering a sale of TSB, the UK bank it acquired from Lloyds Banking Group, back on 2015. The purchase of TSB was described by industry sources as an expensive adventure for the Spaniards.
If TSB should come on to the open market and find a buyer, then that deal may provide a fairer valuation for UK banking assets than incessant rounds of venture cap funding.