Challenging banking archetypes comes easily to Monzo. But does its crowdfunding strategy exploit inexperienced investors?
Could Monzo prove to be a golden egg-laying goose? Perhaps, but there are some important things about the firm that make me nervous.
On 5 December, challenger bank Monzo achieved its goal of raising £20m ($25m, €22m) in less than three days, one of the biggest and fastest rounds of fintech crowdfunding in the UK ever.
In the days leading up to the opening of funding many friends got in touch asking my opinion on it as an investment. And my simple answer was don’t do it.
Getting Millennials to engage with finance is a bit of a holy grail for financial firms. Financial providers clamour for their attention. After all, many 25–35-year-olds are finally coming into a bit of cash and wondering what to do with it.
Monzo has an ace up its sleeve when it comes to engaging with young people. It happens to be a very popular bank, with a very active online community. Its customers zealously praise its benefits and routinely take to social media to remind everyone as such.
I have been a customer of the bank for over a year. I had one of the cash cards, which was converted into a current account earlier in 2018. When it announced a round of investing my interest piqued.
At only three years old, the provider has grown astronomically, increasing its customer base from under half a million to more than 1.2m in less than a year. Dare some call it the Apple of banking? It is certainly tempting.
Imagine if someone told you they had a time machine and you could go back and buy shares in the technology firm in 1983? You could pick up a share for $0.79. At the time of writing Apple shares cost $176.69. That’s a 22,265% return on your investment.
Could Monzo prove to be a similar golden egg-laying goose? Perhaps, but there are some important things about the firm that make me nervous.
It bleeds cash. The firm was burning through £2.75m ($3.5m, €3m) cash each month up to the end of its last financial year in February 2018. This isn’t necessarily inherently bad. Most start-up businesses do. At that rate, it will take just over seven months for the firm to spend all the cash it raised in the latest crowdfunding round.
The last time investors got excited about a financial firm that offered high-cost lending was when Wonga was aiming to float on the stock market. Today, Wonga no longer exists.
It also doesn’t have a proposition that is unique. Competitors such as Starling Bank have a very similar offering. And bigger banks are already catching up with the kinds of bells and whistles that Monzo offers.
The bank has also openly expressed an interest in selling high-cost loans to start turning a profit. The last time investors got excited about a financial firm that offered high-cost lending was when Wonga was aiming to float on the stock market for a value of £770m ($970m, €856m) back in 2012. Today, Wonga no longer exists.
Unlike investing in publicly listed companies or investment funds, buying Monzo’s private shares is highly illiquid. This means investors who want their money back will have to wait for an Initial Public Offering (IPO), a share buyback scheme or a takeover of the firm. Monzo itself admits that it is ‘possible, although not straightforward, to sell shares privately’.
But going back to the topic of Millennials being hard to reach, what makes things so painful for us money hacks is watching things like this happen. Monzo is able to deftly leverage its customer base into capital funding, while the habit of serious saving and investing goes ignored. It also lets customers dig into their overdrafts to invest in the crowdfunding round, in essence encouraging them to take on debt to make an investment that has no definable timeline for a return, a decision that was seen by many as unethical and opportunistic.
Ultimately, if you’ve taken a punt on Monzo for the hell of it then so be it. You may see your money grow, but you must also be prepared to lose. But if you think putting money into the proposition of an unproven start-up is a good place to start a portfolio, you might want to think again.