Tom Blomfield, Monzo: The Path to One Billion Customers Will Take 20 Years
Tom Blomfield, Monzo: The Path to One Billion Customers Will Take 20 Years
One billion customers around the world, a 20-year journey with Monzo, curing a major disease and maybe investing in healthcare education – these are some of the dreams of Tom Blomfield, the co-founder and CEO of Monzo, a challenger bank in the UK. Today’s reality is, on the other hand, that Monzo recently raised approximately £22m from private equity and through Crowdcube. While Monzo is still losing money and needs about three times the number of customers it has now to break even, Blomfield, who is also the co-founder of debit provider GoCardless, says he’s not in a rush.
The next market for Monzo, in the medium term, might be expanding to another European country like Germany, Ireland or France and, somewhere in the future, the US. Another of his plans for the UK, if regulators agree? Bringing about 2-3 million people that have no access to finance out of financial exclusion. But in more practical terms, this year’s plan is launching current accounts for Monzo’s 130,000 customers. Read below our exclusive interview.
Monzo: The Key Figures
340,000 clients needed to break even
Customer breakdown: 55% male, 45% female; 40% in London
15% of customers have more than ten friends on Monzo
90-95% of customers come through word-of-mouth referrals
No revenues yet
Losses of £7m-£8m over two years
Salary range: £23,000 – £80,000
IPO – at the earliest, in 5-7 years
Shareholder structure: management/investors roughly half and half; main investors are Passion Capital and Thrive
Monzo is valued at £65m
What is the profile of your average customer?
The average Monzo customer started out a year and a half ago as basically me. Male, 31 years old, had an iPhone, lived in London, worked in technology. And over the last year and a half, it has really changed: it is 55% male and 45% female; only 40% in London and 60% outside London; iPhone/Android equally split; the age – about half our customers are under 30 and obviously the other half above 30 and all the way up to 85. I think it is quite lazy to say it’s Millenials – it’s people who live their lives on a smartphone. That skews towards younger people probably, but my dad uses Monzo, my grandma – I’ve tried to get her to use it.
How are you targeting them?
It’s mostly word of mouth. People find out about it because their friend has a card and they use it in a bar, and they see a notification, and they just start talking about it. So 90-95% of our sign-ups are through word of mouth referral.
Are you looking to change that? Will you start advertising?
No. We’re looking to amplify our existing strategy. So we’re trying to give people more reasons to tell their friends about us and, in particular, by building network features or features in the app that mean the app works better for you as a customer the more friends you bring on. Traditionally, a bank is a very solo experience, it’s you and your money. You might get a joint account, maybe, for you and your partner, but that’s really it. I think there are a lot of social aspects to your money like requesting money, sending money, splitting bills, saving up together, all of those features just mean that Monzo works better if you’ve got your friends on it.
About 15% of our users have more than ten friends on Monzo. Something like 55% have at least four other friends on Monzo. So we’re seeing this explosion in social circles. One person gets it, and then their ten friends get it the next week.
How many clients do you have at the moment?
130,000 cardholders – that is people who have put money onto the card and received the plastic card.
And how much money was spent/circulated through Monzo last year?
About one hundred million pounds. Last week, about ten million pounds. So it’s growing pretty quickly.
Are you on track for launching new products? The current account?
Coming soon. The same way we did with the prepaid card – we rolled it out to a small, handful of people to make sure it worked and when we were happy we rolled it out to more and more. The current account will work in exactly the same way. We’re testing it internally; we’ll roll it out to 1000 friends and family and then, over the summer probably, we’ll get the whole bulk of 130,000 people onto the current account.
So are you a bit delayed? You said “the spring” in previous interviews.
We’re testing it right now. There is a current account.
What else are you launching this year?
We don’t intend to launch other products. We’re not planning on a Monzo mortgage or a Monzo savings account or a Monzo ISA. We’re launching a current account, which will be a fully featured one. It comes with an overdraft. But then we stop. And, actually, what we do beyond that is turn Monzo into a platform or a marketplace. So, rather than selling a Monzo mortgage, if you do want to buy a house we can help you take your transaction data and go to a mortgage broker and with a couple of clicks get a pre-qualified mortgage offer based on that data. Or, if you have £1000 spare in your account, we’re going to pay you zero interest, but we can help you go to an ISA provider like Nutmeg, for example, and open an ISA in one or two clicks that you can then visualise and control from within the Monzo app. So out goal is to be this marketplace provider for your finances.
So no lending.
We’ll do overdraft lending.
What about other areas? GoCardless has access to SMEs. Are you thinking about doing anything with that?
That’s the reason Monzo is retail only. I spent a few years selling financial services to SMEs, and it’s a hard, hard battle. GoCardless is a great business, but I really wanted to do something that was consumer facing. So we’re absolutely, solely focused on retail customers. There are a couple of accounts recently – I think Tide is offering accounts for small businesses, but it’s not something Monzo plans to do.
Atom bank recently launched a one-year bond. Is that something you will be looking at any point in the future?
No. We just have different strategies. Previously, banks were full service, and they would try to sign you up very young and then lock you in and sell you their products throughout your life as their customer. I think what we see now is a split, a bifurcation to two ends of the spectrum.
Either you decide you are going to be a hyper-efficient balance sheet lender, normally using the internet or mobile technology to sell and service financial products at ultra-low margins, you will just build a really big balance sheet. And you do savings and loans in some form. Or you’re on the other end of the spectrum, which means you’re basically an aggregator or a marketplace and that’s the same with us and with Bud and with a few others.
Atom I would place in that balance sheet category – they are trying to offer hyper-efficient savings on one side and mortgages on the other side. Or Shawbrook – they don’t even have their own consumer interface, they just sell through broker networks. You have to take one or the other approach.
What about other figures for last year? Revenues?
De minimis. As close to zero as to be zero.
And profit or loss?
Loss. To date, we lost about seven million pounds. Seven or eight million over the two years of the company.
When do you expect to be profitable?
Hard to say. Certainly not this year and unlikely next year. We break even on about 350,000 thousand customers, assuming a bunch of things. A normal growth rate, normal marketing spend, customer acquisition. So about 350,000 current account holders help us break even. Having said that, if we grew to that very quickly what we would probably do is just raise more money and expand even faster and accumulate more losses. In this venture-backed business model you take losses, and then eventually you make money, and we are more interested in building a large successful business in the long term than try to get to profitability in the short term.
So let’s say five years from now. Will you be profitable?
Who knows? Facebook took eight years; Amazon took 15 years. I think Amazon was losing one billion dollars a year, maybe a billion dollars a quarter even after their IPO. It depends on what long-term future you take. It’s impossible to predict right now.
Talking about IPOs, are you thinking about anything like that somewhere down the line?
Somewhere down the line, for sure. The value of an IPO is that it gives your early investors and employees liquidity. An IPO isn’t like the management is finished, they are giving up and going home. It’s a bunch of people put their money in on day 1 and after 5 or 6 or 7 years they would like to get a return. That’s the deal you make when you take investment. Eventually, they get that money out. At some point, it would be nice to give those people liquidity and the opportunity to sell.
What we said in our Crowdcube deck was that you shouldn’t expect an IPO for at least 5-7 years, that’s probably the timescale we’re looking at.
What is the shareholder structure at the moment?
It’s all common stock. Management own about half, investors own about half, roughly speaking. The main investors are Passion Capital and Thrive.
How many people in management?
Our executive committee is eight people.
What’s the range of salaries for them?
The highest paid employee is at about £80,000, and I think the lowest paid full time is about £23,000 – the London living wage.
You had a problem about two weeks ago.
Yes, we had a big outage. We were down for about 14 hours. An external provider had an unexpected outage and, because it was down, we couldn’t communicate with the MasterCard network and so card payments couldn’t reach us and we couldn’t authorise them. As a result, people couldn’t use their cards and were understandably frustrated. I was one of them. I was in Tesco and my card wouldn’t work. It was very embarrassing. It was a very unfortunate outage. I think we realised that, to have full control of the customer experience and reliability, we would have to bring that particular piece of technology in-house. And so about ten days ago we finished replacing that third party outsource. We’ve actually got that piece of technology in-house now, which we’re going to be using to run the bank longer term.
Was that a big investment?
What we did was we built a Mastercard card processor and get it certified against a Mastercard scheme. I wasn’t a huge investment, about £200,000-£300,000 – mostly salaries.
And you’re now ready to go?
On the Mastercard, yes.
Were clients understanding?
I think they were. I don’t mean to downplay the outage at all, it was very serious, and we take full responsibility because we ultimately chose the outsource provider. But I think we did several things right – we communicated with our customers early and frequently and told them what was going on and warned them to carry another card. When it was over, we communicated that. If you look on social media the next day, on Twitter the overriding sentiment was positive. Again, I don’t want to downplay the severity of the incident, it was probably our most serious one ever, but I think we communicated it transparently and I think customers, as a result, reacted as well as they could be expected to.
Is Sunday a peak day? Or could it have been worse?
Every day is busy. I think Sunday is our slowest day. So it could have been worse.
About your expansion plans. What is the next market you’re targeting in Europe?
We need to get out current account live in the UK, and we are 100% focused on that right now. I think, also, before we get to a million customers in the UK we are kind of sub-scale. Things don’t really work well. So our eye is on that target of one million customers. Whether that takes two years or three years. We are not going to do anything until at least we can see that we will achieve the one million. The reality of Brexit, though, is that, to operate across Europe, we will need a second licence. And so we will probably begin the process of getting a second licence in one of those countries in the next year or two. We haven’t decided which country.
Which ones are you looking at?
We haven’t started yet. The closest ones are Ireland, France, Germany. In terms of internationalising, we will look at passporting for the short term perhaps, but currently, the focus is on the current account.
When you say one million customers in 2-3 years, is that the target?
We don’t really have targets. They’re just not that useful. What if you achieve three times that? What if you achieve half of that. So we have an amount of capital in place for the next 12 months, which will enable us to get to that profitability number without having to raise more money but I think we are trying to build a product that people love, that people share with their friends and if that helps us grow faster, that’s brilliant. So we tend to avoid rigid targets. If you don’t hit them, what happens? You sack a lot of people? If you hit them early, what happens? You get a pay rise? There’s so much uncertainty externally that it’s sort of up and to the right.
You tell me. If you reach a million clients in one year, earlier than your “target”, what happens?
If we reached a million customers within a year, we would probably have to raise more capital. I think that’s the main impact. So we would probably have to slow down customer acquisition until we raised more investment capital. The amount of regulation capital that we have is a function of a number of things, including operational risk. The risk of IT systems going too. That is multiplied by the number of customers you have. The more customers, the more capital we need. So, if we got to a million, we’d have to slow down customer acquisition and raise more money. Hopefully, raising money would be a lot easier in that situation. We’d say: look, we’ve got this many customers, we’ve got this thing, why don’t you invest another 20 million pounds?
You are saying in your investor deck one billion customers.
Yes. We’d need a lot more capital.
So after Europe, which market are you targeting?
The US is very interesting to me, personally, because I lived there for a year, I was very frustrated with their banking systems. It feels like the UK market, but a few years ago. It feels like they’re stuck in the feature phone world before the smartphone came along. It works, it makes phone calls, it sends SMS, why would I want a different phone? And then you come with something different, and it’s like “of course I want that thing, that thing is better”.
That, for me, feels like where the US is right now. There are 350 million people, they mostly all speak English, they are relatively speaking as affluent as the UK. In terms of society, they are similar. Each country is very different – France and Germany are very different to the UK. So the US gives us access to 350 million people without having to go through a different language.
What about India and China? Everyone is talking about them.
The problem there is that, as well as them speaking a different language, the wealth/economic disparity is still huge. And so just the economics of our business model don’t stack up in the same way. So you have to go with a different operating model, and frankly, there are a bunch of companies there doing very well. So what makes me think that we can go and do a better job in China? Frankly, nothing. Whereas the US seems similar enough that we could go and have a good shot at that.
What about the market? What would be useful to have still?
A few years ago we had all the peer-to-peer lenders, higher at-risk investments, more access to short-term, unsecured finance, we had several FX players, like Transferwise and Revolut. We’ve seen a big move into mortgage broking now, a bit in insurance technology – I use Cuvva for on-demand car insurance – we’ve got ISAs and savings accounts coming up. Right now, the thing that everyone is doing are these nudge savings accounts – there is an oversupply of people doing that right now.
A big area for me is retail loyalty and cashback. You had these Amex air miles and cash back cards, basically founded on high interchange. So, with a credit card, the merchant would pay 2%+ to accept credit card payments and what the credit card company would do is basically take that 2%, give 1% back to you as a customer as a “bribe” to come and use their card and keep 1% by virtue of them being an oligopoly. And the European Union came in and said “that sounds like a competition issue, how about we just cap your pricing at 0.3%.” What that meant is that these credit card companies can no longer afford to give the same level of cash back – you can’t give 1% if you only earn 0.3% and so air miles have been gutted, Avios has been gutted, all the cash back schemes have been totally gutted. But people are still asking for points. And so, for me, that area is ripe.
The analogy, for me, is like display adverts on the internet. Where we are at the moment is like people buying banner ads and that’s like buying cash back schemes or points. I feel like it would encourage people to come and shop at my store some more. Can I measure the impact? Not really. If I think my audience are young males, I’ll try to put it on a car site or a sports site, but not really tracking it back to purchase. So, from banner ads, Google AdWords comes along and says: “Why don’t you track exact key words and also give you a completion tracking mechanism – when they actually make a purchase, we’ll track it through.” So you can bid on that actual purchase. So you know if you invest $10,000, that’s going to draw you $14,000 of sales or whatever it may be. So you can prove ROI. That is what I think is going to happen in retail cashback and loyalty. It will be like, “My Tesco store in the Essex Road is empty between 1 and 4 pm, so I’m going to offer a discount to anyone within 100m to go and shop there.” Or, “I under-index on 25 to 35-year-old females, let’s give them an incentive to come and buy food, or beauty or sports products.”
How would that work? One company would sign up all the retailers and… ?
The “how” is the hard part, and that’s why nobody’s done it yet. There is a company called Bink in the UK, they get a feed of data from Amex, Visa or Mastercard. So with customer opt-in they can see all your card purchase data, and then they go and strike deals with all the retailers to say that “if this guy comes to shop, and he’s not signed up for your loyalty scheme, we’ll sign him up and accumulate points and then you can offer him discounts.” So, from the customer’s point of view, there is an opt-in and then, after that, it is totally seamless. It just connects the data all the way through. It’s not working at huge scale yet, but I think that aggregator model is really interesting. I hope it’s the kind of thing we can build on top of Monzo one day.
Looking at the more traditional players in the market, on a scale of one to ten, where are they innovation-wise?
It’s just not a priority for them. The priorities for the big banks are, basically, regulation compliance and cost cutting. And they spend all their time and energy thinking about it. And then Brexit comes along and suddenly, that’s a regulation and compliance issue. Or PSD2 comes along and they have to comply or they have too many branches, how can they close them down? Or upgrade their IT systems to reduce cost. Innovation, at most big banks, is theatre. They do innovation theatre. It’s like security theatre at the airport. Doesn’t really increase security, it just makes people feel a bit better about it. And so, you go to all these digital labs with the big banks, and they’re all wearing Converse and they’ve got ping-pong tables and brick walls and they show you these great designs and you ask them, “What’s the last product feature you actually shipped?”, and they say, “Oh, no. We don’t actually ship stuff. We innovate. We sit in our office and come up with ideas and the actual business is done somewhere else”.
Innovation, at most big banks, is theatre. They do innovation theatre. It’s like security theatre at the airport. Doesn’t really increase security, it just makes people feel a bit better about it.
I just don’t think it’s on their radar. I’m a big fan of Clay Christensen’s Innovator’s Dilemma, which describes how these pretty successful businesses locally optimise, they’re well-run, so they’re maximising profit every quarter, and real innovation often will cannibalise their distinct business. And none of the big banks really wants to take a 50% revenue cut in the next two years because they’d all become unprofitable and lose money and their CEOs would be sacked. All these people are incentivised on a relatively short time horizon. So why bother taking a 50% revenue cut? It’s like they’re on a low peak and to get to the higher peak, they’ve got to down into the valley for quite a long time. But they’re only two years away from retirement so why not just sit there on top of the little hill and think they’re doing well?
So the problem is not that they’re not innovating. It’s that they don’t want to actually roll it out into their products.
I question whether you really are innovating if you’re just sitting there and talking about stuff. To me, action is delivering the improvements to your customers. And a lot of the improvements are like, “Hey, stop charging penalty fees. That would be a great innovation.” But they make lots of money from penalty fees. Or when I go abroad, why do you charge me 7% to get cash out? You could innovate and stop charging me, but you’d make less money. So, it’s pretty straightforward what they have to do, but they’re caught in a hyper-optimised spot right now where they can’t cut costs fast enough to cope with the revenue step.
What is the most innovative product you’ve seen from a traditional bank?
I think Barclays are probably the best ones. I think that Pingit, while not a huge success, showed they were trying to do something. Barclays were the only ones experimenting with the cheque imaging stuff. They try, but they definitely have this internal issue of each team being protective of its own line, and if another product comes and threatens the profit, then it’s going to get killed. So I think that’s stopping them from being truly innovative.
What about a truly innovative product from your competitors?
I think N26 in Germany is doing a really good job and Neon Bank in Brazil. I spoke to their CEO a couple of weeks ago, and they have acquired one-one and a half million customers in two years in Brazil, and the stuff they’re doing is very interesting. Very similar message to ours – most of their sign ups are word of mouth referrals, not paid advertisement, they’re looking at different ways to help people save and invest money.
What are they doing that you think is really good?
They have delightful single touch product experiences, basically. You want to simplify it down – you can sign up very quickly, you can manage your money very quickly, stuff works the way you expect, without crazy, confused charges.
So consumer experience is fantastic.
Consumer experience is the key to all of this.
One product you wish you’d developed first?
Google. There are so many. I love technology and playing with all these things. I used to spend my teenage years building product after product after product. I built this thing called Capital Rentals which was Rightmove before Rightmove existed. But I was 16 and didn’t know how to do any marketing. I built a student marketplace about the same time Facebook was launching back in 2003. I love consumer technology.
Will you start other companies at a certain point? Do other things? Or are you in love with banking and that’s it?
Monzo feels like a unique opportunity to have an impact on loads of people around the world. Who knows how it’s going to pan out? Are we going to hit a million customers or not? Will it be a billion? Who knows? If we do hit one billion, it will take 20 years, and so for me, it’s a 20-year journey. Do we get there? I can’t tell you right now. But the feeling of Monzo right now is very different from anything I’ve done before. It feels like we’re onto something special and I want to see how far we can take it.
What other industries other than banking would you be looking at?
Healthcare education. They’re the things that impact our society in a fundamental way. If you can make a 5% improvement in healthcare education, you can actually improve the world in a very dramatic way. My ultimate goal is to be able to have the kind of impact that someone like Bill Gates has had. That man created Microsoft and used the proceeds to basically cure malaria and a bunch of other diseases. And I think that if you, as an individual, aspire to have that kind of an impact is one of the reasons to get out of bed in the morning. I’d love to be able to contribute to the world in that way.
“If you, as an individual, aspire to have that kind of an impact is one of the reasons to get out of bed in the morning. I’d love to be able to contribute to the world the way Bill Gates has.”
What about UK regulation?
The UK regulators are the most forward-looking in the world. That doesn’t mean they’re perfect, but there has been huge inputs from the government, No. 10, the Treasury and the senior levels of the FCA and PRA to open up competition in financial services. That also came from the European Union, the PSD1. With banking regulation in 2013 again, I really think they are pushing for more regulation. However, there’s always more to do. The thing we will be looking hard at in the next year or two are the onboarding identification requirements for new customers. In particular, our obligations to detect and prevent money laundering, terrorist financing and similar activities. Are they commensurate with the risk we’re facing? And what detriment is being put on all the people who are financially excluded as a result? As a bank, we have to check if you’re a terrorist. We have to take identification documents and check you against sanctioned lists. Some people find it very difficult to get access to the documentation required, so they don’t get access to finance. So they end up paying way more for all of their life and basically resort to loan sharks for credit. In the UK, about 2-3 million people are financially excluded. I would like to find ways to help those 2-3 million people come into financial inclusion whilst mitigating and minimising the risk of money laundering and terrorism as far as possible.
Do you have a solution for that?
Yes, basically tiered accounts. I believe you should be able to open an account very quickly, get started in a few seconds, with relatively low identity checks, and have spending caps on your account, at least initially. £100, £1000, whatever it is. There is a risk someone will launder £100 or £1000, but you’re actually bringing 3 million people into financial inclusion. I believe that’s a risk worth taking. Clearly, that’s not my choice, it’s a choice we as a society – the Parliament – will ultimately have to make. But with a tiered account, you get started, you prove that you’re using it in a legitimate way, you prove that you don’t have a thousand accounts, you’re not someone who launders money through lots of accounts, you have a single account, you’re using it the normal way, you use it in a radius around your home, you’re getting your benefits or employment paid into it, from someone who’s close by to you. You establish a pattern of behaviour that illustrates that, actually, you are a 21-year-old living in Stoke and you’re not a terrorist financing attacks in the Sudan.
When do you see this happening?
We have had very constructive conversations with the Government regulator, about this, about more risk-based approaches. I think it’s on their radar.
Are challenger banks affected by the negative image post-financial crisis, post interest-rate rigging scandals? Or is it such a different model?
I think positioning ourselves as different and distinct from those players with slightly tarnished reputations actually helps us. Everyone needs banking and access to the financial system. Given that you have to participate in this, would you prefer a provider who rigged Libor or one who did not?
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