Today’s banking industry – like nearly every other industry – is undergoing major change. A new breed of firms, sometimes called “challenger banks,” is questioning the very conventions that have long defined what a bank does and how it operates. These firms are harnessing the power of digital channels to reinvent traditional banking products and services and connect with customers in whole new ways. Monzo, a digital bank based in the UK, is a leading “challenger.”
Founded in East London in 2015, mobile-only Monzo received its full banking license from the UK’s Financial Conduct Authority and Prudential Regulatory Authority on April 5, 2017, allowing it to offer its customers current accounts. The start-up recently completed a £2.5 million crowdfund campaign, attracting a record-breaking 6,500 investors to reach a fundraising total of approximately EUR35 million. Today, Monzo has more than 200,000 customers. As Deputy Chief Executive of Monzo, Paul Rippon is a champion of the “challenger” mentality. He recently spoke with ISG's David Locke and Owen Wheatley about the company’s journey.
ISG: What is the genesis of Monzo Bank and what’s the journey been like so far?
Rippon: I’m not sure if there’s a single moment when the egg broke and we all climbed out. For the founding team, there was an accumulation of events. We all saw the effects of progress in other areas of our lives, but felt that time had stood still in the banking industry. For example, you can go to Google and ask “Who was the President of Uzbekistan in 1837?” and you’d get a response in a split second. But you contact your bank and ask for your bank statement from a year ago and it’s unlikely you’ll get it online. You’ll probably have to wait a week to get it through the post. You might even get charged 20 pounds for the privilege!
If you want an Uber, it turns up. If you want information, you go to Google. If you want to share an opinion, you go to Twitter. This is all available now, but your banking experience is just so far adrift. If I want to smile and give you a 10 pound note, I can do that, and yet I can’t send you a smile and give you 10 pounds through my bank. This morning, having gone out for breakfast, my colleague sent me his share of the bill using our Monzo app. So before we’d walked out of the cafe, Matt had sent me the five pounds with a picture of a frying pan and an egg on it.
[Paul pulls out his phone to show the transaction].
Rippon: So we had a frustration with the [banking] industry and where it’s going, based on our experience of being part of it as well as users of it. Collectively we thought we could do a better job. We refer to “bank account” and “bank” when we talk about what we’re doing, but, at the end of the day, we want to try and make the day-to-day managing of your money and all the things around that easier. The journey began with an app, then we had a prepaid card, then with a banking license comes the opportunity to offer a current account. Ultimately, we will understand and use all the data we gather (with our customers’ permission) to work out how they live their lives and whether they need help in other areas, like completing a tax return. A customer might, for example, be interested in living in a particular house. Maybe Monzo could help work out the best way to finance that. Getting a mortgage is one option, rental is another, and then there may be some hybrid option where we pick the best of both. Mistakes some banks have made is to try and sell you a product, like a mortgage, rather than understanding your needs. In this scenario, you don’t want a mortgage, you want to live in the house, and the financing is a secondary consideration.
ISG: So it’s about experiences and outcomes rather than just products and services?
Rippon: Yes - and it’s about helping people manage their day-to-day money. The prepay and current account products and services do that, but we’re also here to give our customers support. We want them to see Monzo as their best friend, their favorite app and their bank all rolled into one. They should feel that we’re looking out for them, helping them, got our eye on what’s going on and making life genuinely easier. Our journey is very much about finding solutions that are right for our customers using the power of data. We will concentrate on helping you look after your money by sourcing the right product, be it mortgage, rental agreement, credit card or loan. Our expertise is not around doing those things, it’s in finding the right one for you.
ISG: It sounds like you’ll be operating on a sort of broker basis. Is there a revenue model around that?
Rippon: Yes. We refer to it as “marketplace” bank, but I guess more crucially, what it means is we’re aligning our activities with the interests of our customer. For example, say you are travelling - you take off, fly, land, and then suddenly realize you forgot to get travel insurance. Your current banking experience is that you land, you try to use your card, but for some reason you can’t – maybe because you’re abroad – and you’ve got no insurance. The Monzo experience is different: you take off, you land, you arrive, you switch on your phone, you get a welcome to the country, you get told what the exchange rate is (there are no fees), you then get a link to the top travel tips from other Monzo users to let you know what to watch out for. Then it’ll flash: “Did you sort out your insurance or do you need some help?” So you say, “Yes please, thank you very much.” Since Monzo knows all about its customers, with their permission, we can broker their request and get them a good deal on insurance for however long they need it.
ISG: Some of the people we’ve spoken to at established banks say the thing they’re most concerned about is the Monzo model – a model that makes you the primary interface to the customer. This gives you access to the customer and their data, meaning you understand their preferences and facilitate established banks’ products through your interface. The established banks are reduced to utility companies competing with each other on price. From their perspective, this is a huge threat. For you, it’s a big opportunity.
Rippon: If you look at the global technology change of recent years, it’s been driven by companies like Google, Facebook, Twitter – it’s been about providing a platform for content that comes from elsewhere – some social and some from companies. Our journey is quite similar. We’re building a platform and a very strong relationship with the customer and the other products and services. Some of them will effectively be utility provision while others might be more bespoke. Most likely, there will be different levels of pricing. Traditionally, if you’re building a bank with the aim of having a billion customers, you’ll think “What a huge balance sheet!” Or maybe not. Maybe our balance sheet is almost zero.
ISG: So you can monetize data in any number of ways - not necessarily through selling products.
Rippon: Yes, insights are even more useful. We’re already doing some early work around gathering insights from the data. Like how people spend their money or ask us for help. We can then use that data to provide insights, for example, to deliver travel tips like, “Here are a few things other Monzo users who have been to Cuba have said about using ATMs.”
We could set up an app in an afternoon, but getting a banking license took us two years. The easy way to do it would have been to just do everything on an agency basis, without bothering with the banking license. But having a license means you can take deposits, join payment schemes, and it means those deposits are protected by the Financial Services Authority Compensation Scheme, which gives people reassurance that their money is safe. It also protects Monzo from being squashed out of existence by banks that don’t like the fact that we are increasingly levelling the playing field and disrupting the market.
Are the big banks going to vanish in the next six months? Of course not. Might they be around for the next 400 years? Maybe. But I believe the way they interface with their customers will have to change. Increasingly they will be decaying infrastructure providers, whilst we develop our peer-to-peer payments, which allows us to send five pounds and happy faces in a few hours. How long is it going to take VocaLink* to get something of that ilk? It might involve years of development and take millions of pounds of investment, whereas a couple of our guys can do it in an iterative way a few hours at a time.
ISG: And is that fundamental philosophy of being the broker for the customer the only layer you’re interested in? Or will there be opportunities to enter, say, the loans or mortgages market now that you’ve got your license?
Rippon: I can’t predict the future, but I think most banks try to be everything to everybody. Ultimately, it’s a set up that customers tolerate, regardless of whether it’s good or bad. So we’re here and doing okay. 200,000 customers have decided it’s worth giving us a go and we’re learning stuff along the way. If you want the opportunity to help a billion people look after their money, you have to think about how you are going to make that scalable. For Monzo, scalability will come not through us manufacturing the bulk of those services, but by bringing in relevant products and services that are appropriate to our customers. When a customer is looking for a new house, we will have the ability to source a mortgage to them at that point, and not until that point.
The general concept is that people want their bank to do everything. But banking customers typically hold no more than two, or maybe three, products at a given bank. Wow! Clearly it’s not actually essential to us all that we get everything from our bank. It ends up 60 percent of mortgages come from mortgage intermediaries despite people saying they want a bank that provides mortgages.
ISG: How do you engage with your customers to measure whether they’re pleased with the Monzo experience or how it can be improved?
Rippon: In lots of different ways really. If you’ve seen our community board, last time we checked there were thousands of postings. Some of our customers spend a lot of time there debating, commenting, talking, helping, suggesting, cajoling, criticizing. They are part of the conversation, and I think it’s fascinating that quite often the conversation is around Monzo and what we are doing. But they’re not talking about “the” bank or “your” bank. It’s “our” bank and what are “we’re” doing. It’s very humbling.
We also publish our product roadmap to be transparent. It shows the stuff that we’re working on and what they’ll see in the next few days, weeks, months and long term. Our customers can express interest and pose questions. We give them sneak peaks and they can vote up or vote down on areas that we’re working on, so they can help set the agenda and the speed at which we go. But we have to balance people’s demands with our own responsibility to come up with new solutions. As Henry Ford said, “If you ask people what they want, they’ll say faster horses.” Asking, debating and engaging with customers is great, but it’s also our job to say “well, how about something totally different…”
ISG: What are your biggest challenges?
Rippon: To be a bank, you have to have a plan for viability and sustainability, which means you have to be able to generate profits and capital. Our plan does that. There’s hiring, there’s setting up the contracts, there’s building the technology. We took the decision to build all the technology in house. We build our own iOS and Android apps as well, and even connecting up to the payment schemes, we do that ourselves as well. But it’s got to start with building and supplying products to customers that they want and like and use because, without that, the other things – engaging with customers, getting funding, sorting out contracts and hiring staff – don’t really matter.
ISG: As you grow and scale up, will it become more difficult to keep that sense of customer engagement and entrepreneurial spirit, to do things in house and make it an experience-based offering? Or do you think the nucleus of people you have here will always make sure it stays the same?
Rippon: Our approach is evolving as we grow. For example, yesterday at a team meeting, we set out a new approach to break up into smaller teams with more clarity and focus. As we’ve grown, we’ve made changes. We didn’t put a communication structure in place for a team of 12 that will work for 10,000 people. We put it in place for a team of 12 and then, when it got to 20, it didn’t work any longer, so we changed it and put in place something that worked for 20. So we put in place what we need for now and the immediate future. There are some things that we’re more attached to like how we organise our data, where we host, what payment schemes we can be connected to. There are other things, like whether we will lend on other products or loans, which are more distant.
ISG: Who do you see as your main competitors where you are today?
Rippon: Amazon, Twitter, Google, Apple, John Lewis department stores, Uber….
ISG: Most people would expect you to say other banking organizations.
Rippon: Well, the banks as well….
ISG: But it’s interesting that your instinctive response is to talk about organizations that focus on the customer experience. Your philosophy is different from what you might call a classic bank because you talk about ‘banking’ as a sort of framing term.
Rippon: Banking is part of the journey. It’s not the destination. The only common definition of a bank is the fact you can take deposits. Whether you do anything with those deposits, whether you lend or whether you provide other products and services is entirely up to you.
* VocaLink is a UK-based payments systems provider to banks, corporations and governments.
About the authors
David Locke is Client Partner and Managing Director in the UK ISG Business. He leads ISG business relationships with flagship global and UK clients. He is privileged to lead, motivate and support talented colleagues in building highly effective solutions that enable his clients to become the most competitive in the world.
Owen Wheatley has built a decorated career, serving clients across multiple industries with a special focus on enterprises in the financial services sector. Advising clients on IT strategy and the digital agenda, Owen leads high-performance advisory teams to design and implement major transformation programs, structure complex transactions, negotiate with service providers and advise on a broad range of market trends and sourcing activities. Most recently, Owen worked with a large European bank to develop a new workforce strategy that optimizes internal resources and unlocks significant savings. While at a major UK-based retail bank, he led a large advisory team to define and implement an IT sourcing strategy that led to associated savings of more than £250 million. Owen holds a BSc in economics, is a chartered accountant fellow with PwC and has been widely published in his capacity as a recognized thought leader in his field.