App-based bank Monzo, the UK fintech that is especially popular with millennials, has reached a $2.5 billion valuation just 6 months after securing investment at £1 billion. The latest £100 million cash injection, which has been led by a major U.S. investor, almost doubles Monzo’s valuation, having been made at a £1.9 billion ($2.5 billion) valuation. With the home grown fintech ‘unicorn’ securing its first major investment round at a valuation of £8 million back in 2015, it has now multiplied that by 250 times in just four years.
While the deal has been signed off on by both Monzo’s board and the investors, it could still take several months to conclude. The Prudential Regulation Authority also needs to approve the deal. While that should be a given, the procedure does take some time.
Despite a number of online only and app-based ‘challenger banks’ having been on the market for several years now, they haven’t yet truly posed a real threat to traditional high street banks. They have gained most traction with millennials but are most commonly used as a secondary account for travelling and international transfers because they offer better exchange rates and lower fees.
But factors such as trust and a lack of other retail banking services such as credit cards, personal loans and mortgage facilities have so far held them back from making the leap to really threatening the market share of the established high street banks. Balances held in online-only accounts are typically small and in the lower three digits.
However, there are signs that a tipping point that sees more customers switch to online-only challengers as their main account may be near. Revolut, TransferWise and Starling, especially the former two, are other examples of well-funded challenger banks. TransferWise has recently received a banking license having first gained traction as a cheap, online only currency conversion and international transfer service only. But its large user base immediately makes it a serious player in the market.
Monzo and its fintech peers are starting to add additional financial services such as credit cards and personal loans as well as low cost platforms for investing online in funds and shares. Technology investors clearly smell a changing wind and have started pouring venture capital into the challenger banks more aggressively, giving them the resources to step up their assault on the established market dominated by household names such as Barclays, HSBC and Lloyds.
Last October Monzo closed an £85 million investment round led by U.S. venture capital in the shape of Accel and General Catalysts. Another £20 million was brought into the coffers through a crowdfunding campaign. The fact that the latest round at almost double the last valuation is again led by U.S.-based venture capital indicates that Silicon Valley sees a future North American market for UK fintechs. British start-ups now dominate the fintech scene and recently floated P2P lender Funding Circle and small business lender OakNorth join banks Monzo, Revolut and TransferWise as being valued in excess of £1 billion – the level at which a young company is classed as a ‘unicorn’.
The next step for Monzo and other challenger banks is to now find a way to turn account holder numbers into profits. Convincing account holders to make their online only accounts their ‘primary’ account, that their income is paid into, is the first key milestone in this regard. Monzo says that 20% of their account holders now do so, though the average balance is still a modest £250. Creating an ‘ecosystem’ of financial services including loans and mortgages, often in partnership with other fintechs, is also a key development it is hoped will lead to sustainable profitability.