How Monzo is banking on customer apathy

Earlier this month, Monzo said that it was teaming up with fellow UK challenger bank OakNorth to offer its customers tax-free cash ISAs for the first time, as well as fixed-length savings accounts ("🎉").

In a blog post announcing the news, Monzo said:

We’re offering ISAs from OakNorth because they offer some of the best savings rates on the market, and are as committed to innovation as we are….

OakNorth -- which recently secured $440m from Softbank's Vision Fund and which currently holds the current most-highly-valued-European-fintech crown, with a price tag of $2,8bn -- does indeed offer some of the best savings rates on the market.

But the funny thing is, Monzo isn't offering its customers those rates.

Whereas if you went straight to OakNorth for your instant access ISA you would get 1.44 per cent annual return, you only get 1.14 per cent if you go via Monzo (in other words, you'd get more than a quarter more annual interest by going directly to OakNorth). The differentials are even bigger for other products: there are 40 basis points between OakNorth's six-month fixed-term savings account and the same account accessed via the Monzo app.

So what gives? Well apparently, this is a fair price to pay for the convenience of having all your accounts in one place (though only one in five customers have their salary paid directly into their Monzo accounts, suggesting most people already have accounts in different places). A spokesman for Monzo told us:

There may be better rates in the wider market, especially early on as we build out our offering — we strongly believe that making it easier for customers to save is worth it though.

An FCA study into savings showed that many people did not take advantage of high interest products from specialist and challenger banks because they don’t want the hassle of managing multiple accounts. We hope to change this and have built a product where people can seamlessly move money into a compelling easy access offering that is integrated in their current account through the Monzo app.

Monzo is a bank that prides itself on transparency. And to be fair, it does note, in the blog post announcing the OakNorth tie-up:

So you know, we earn 0.2% from OakNorth on the money you save.

The other chunk of the 30-40 basis points' difference between the rates (so 10-20 basis points) is kept by OakNorth. A spokeswoman for OakNorth told us:

These products appeal less to the “rate chasers” and more to those who still want to make interest on their savings (certainly much more than they’d get on average from a big five bank), but are willing to relinquish the 30-40bps they’d get from coming us direct, in exchange for all the other benefits.

Those "other benefits" are (aside from the convenience factor): the fact you can open an account with £500 rather than the £1,000 OakNorth usually requires, and that you can get support 24/7 in the Monzo app. (There is also a higher maximum deposit but presumably if you have several hundred thousand pounds to save you might be less willing to relinquish those 30-40 bps.)

Monzo says the fact that you can earn more interest by going directly to OakNorth is pointed out in the T&Cs, but as we know, people don't really read those. Saying they earn 0.2 per cent from OakNorth feels a little disingenuous when it's actually really the customer Monzo is earning that 0.2 per cent from.

Also Monzo, whose CEO Tom Blomfield was honoured earlier this year with an Order of the British empire (OBE) for "services to Improving Competition and Financial Inclusion in the Banking Sector", sells itself as a not-like-the-other-banks bank. On its site, it tells customers (emphasis Monzo's):

We believe in an alternative to the banking of the past

We’re focused on solving problems, rather than selling financial products. We want to make the world a better place and change people’s lives through Monzo.

But the truth is, Monzo should be focused on selling financial products. It is supposedly a for-profit financial company after all. But unlike OakNorth, which is the first (and only) UK neobank to have proved itself as profitable and which more than tripled its earnings in 2018, Monzo has never made it into the black. And it's not like its shareholders are all evil investment bankers that don't care about making the world a better place like Monzo. 36,000 of its very own customers own shares in the bank -- the result of a £20m crowdfunding round in December that sold out in less than three hours.

Actually Monzo is indeed focused on selling financial products. In fact, unsurprisingly, selling financial products is exactly how it intends, one-day, to become profitable. According to The Times:

Blomfield, 33, envisages Monzo becoming a one-stop “control centre” where people can easily manage their incomes and outgoings, such as mortgage payments, savings and energy bills. He sees these services being provided by third-party brands that pay commission to Monzo.

But as we can see with the OakNorth tie-up, it's usually the customer who ends up, de facto, paying this commission. And from Monzo's point of view, this kind of rent-seeking -- the kind that Blomfield has in the past derided in his personal blog -- makes sense. In fact, this marketplace model is the only way challenger banks that aren't doing substantial amounts of their own lending, like regular banks (and like OakNorth) can in fact make money.

But it doesn't feel that much like this kind of thing, from the customer's point of view, is making the world a better place. And Monzo is likely to struggle to sustain a business model that relies on customers forsaking a quarter of their annual interest just for the privilege of having all their accounts in one place, particularly in an open-banking world where aggregators are proliferating.

Related links:
Will fintechs sink or swim when floats are regulated?
- FT Alphaville
Whoever said fintech was really all about branding? (Update*) - FT Alphaville SoftBank-backed lender OakNorth triples profits - FT

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