August 03 2020

Why is Monzo struggling more than Revolut?

Written by Kapronasia

As the pandemic-induced downturn worsens, two of the UK's most prominent neobanks are taking diverging paths. Revolut continues to defy gravity. It raised yet another US$80 million as part of an extended Series D round in July. In total, Revolut raised US$580 million in that round at a valuation of US$5.5 billion, unchanged from February. Monzo, on the other hand, appears to be on shakier ground. While Monzo recently managed to raise another US$76 million, its valuation plummeted 40% to US$1.6 billion from US$2.6 billion. Worse yet, the company's annual report reveals heavy losses of US$149.5 million in its 2020 fiscal year, up 140% from the previous year's US$62 million.

If Monzo continues to hemorrhage cash that way, it will struggle to find a clear way forward. It is currently stuck between a rock and a hard place. Its business model relies on torrid user growth, but that's hard to achieve during a massive public health crisis and global economic recession. Monzo has it eyes set on expanding in the virus-ravaged U.S., where the economy contracted by almost 33% in the second quarter. Economists reckon the U.S. economy will not recover to pre-pandemic levels before 2022.

Monzo thus may need to focus on monetizing the 4.3 million customers it already has, rather than expanding to new markets. The company derives most of its revenue from transaction fees it charges customers when they use their Monzo cards. That revenue has fallen in tandem with the sharp drop in international travel. The challenger bank is hoping it can diversify its revenue sources with the launch of several premium products, the premium account Monzo Plus and something with travel-related features.

Monzo struck a cautious note in its annual report, a departure from the unbridled optimism of years past. “Our revenue streams have been significantly impacted by the COVID-19 pandemic and resulting macroeconomic uncertainty,” Monzo wrote. In the report, chief executive Tom Blomfield said, “Our focus right now is on becoming a sustainable company that’s here for the long haul . . . this year will be pivotal.”

Revolut has also been adversely affected by the pandemic and ensuing economic downturn, but unlike Monzo, it has not laid off staff, suffered a hit to its valuation or signaled broader concern about its future prospects. One possible reason for Revolut's confidence is that it has a larger war chest than Monzo. Revolut has raised more than US$916 million overall, compared to Monzo's US$396 million. Additional money could help Revolut better weather tough market conditions.

However, Revolut also has higher costs given its bid to go global at warp speed. While Monzo has offices only in the UK, Revolut has 20 offices in 18 different countries, with a total of 2,000 employees. Monzo has about 1,500 employees.

At the same time, Revolut has more customers - 12 million compared to 4.3 million - and products than Monzo. In addition to its pre-paid debit card for global travel, Revolut offers equities investment, gold trading and cryptocurrency trading. In Lithuania, it has a full banking license and may look to offer more of the same throughout central and Eastern Europe.

With its newest funding, Revolut plans to expand its U.S. business and new rewards program. "Given the current climate, we’re delighted to be in such a strong position to bring better banking services to people around the world,” Revolut CEO Nikolay Storonsky told Financial Times. The U.S. market could be key for Revolut, as interchange fees - from which Revolut earns 80% of its revenue - are about 2% of transaction value, compared to 0.2% in Europe.

To be sure, investor's confidence in Revolut seems unshaken for now, even if they and Revolut both realize the company's valuation is on the high side. A February Sifted report noted that Sweden's Klarna, which has the same valuation as Revolut, has been profitable for 15 years and posted 4 times as much as revenue in 2019 as the UK challenger bank.

Storonsky recently told media he still expects Revolut to be profitable by year-end, a forecast he made earlier in the year before the coronavirus pandemic had tanked the global economy.

It is worth taking his bullish prediction with a grain of salt.