Monzo and Marcus: American challengers or just noise?

My mate Ron Shevlin is on good form these days. He’s written quite a few columns on Forbes that are clickbait:

• Customers don’t want digital banking
• The FinTech fast follower fallacy (which I spotted just after writing this yesterday)

His latest created quite a twitter furore and was targeted at Monzo’s launch in the USA.

The 5 Keys To U.K. Digital Bank Monzo's Success In The U.S.https://t.co/b9LqzVlqUr#fintech #banking #digital@monzo @MeganCaywood @Chris_Skinner @sbmeunier @SpirosMargaris @sytaylor

— Ron Shevlin (@rshevlin) June 17, 2019

Monzo, as you may know by now, is a FinTech unicorn challenger bank who are claiming 60,000 new account openings a week in the UK with over two million accounts. In a blog post last week, they announced plans to launch in America.

Ron is sceptical of this plan. He points out five factors critical to their success and claim they fail on at least four of them.

• Can Monzo Deliver a Better Customer Experience?
• Can Monzo Provide Superior Product Features?
• Can Monzo Provide a Better Value Proposition?
• Can Monzo Do Marketing Better?
• Can Monzo Create Affinity Among Consumers?

It’s an interesting view, but not one that we Brits agree with. Admittedly, for example, I’ve been cynical about all the new challenger banks launching in the UK, but they all seem to be succeeding to a varying degree with Monzo the breakout winner of the group so far. That’s because they are succeeding in all the factors Ron highlights above in Britain, so why wouldn’t they do that in America?

I guess because the US is a more conservative country. In fact, it’s not a country at all. It’s fifty countries united under one flag. That’s the real issue that I think Monzo faces. How to gain traction across the US markets, and my view is that it’s far more likely to gain traction in the more liberal and dynamic US states than in the deep South. That’s my view anyways.

In terms of the overall discussion, I also think Ron is wrong. Monzo will gain some success in America, but its real constraint is funding. For example, the most successful new bank launch in consumer markets has to be Goldman Sachs’ Marcus. It’s fast reaching $50 billion in deposits, four million deposit accounts and being recognised as a real challenger.

Goldman Sachs CEO David Solomon is complaining that the bank is “getting absolutely no credit from anybody else in the investing community” on the firm’s digital banking efforts, and he has a point. Monzo gets two million customers in the UK and gains a $1.3 billion valuation; Goldman Sachs launch Marcus, get four million customers, $1 billion in deposits a month, launch a credit card with Apple, and its share price falls almost 20%.

As Solomon states it: “If we were out in Silicon Valley and made 20% of the progress that we’ve made, we would get a lot of credit and people would be throwing money at us to own a piece of this business. But nestled inside little old Goldman Sachs, we’re just going to have to prove it over time.”

And he’s right. I hear it a lot from bank CEOs. They are valued as banks and not as tech firms or start-ups. No one looks at their potential, but just their return-on-equity and cost-income ratio. Sad.

Anyways, I pivoted the conversation with Ron from Monzo to Marcus.

Why do you think Monzo US will struggle when Marcus US succeeded? What made Marcus successful? Interest rate bribes ... maybe that's the bit Monzo is missing?https://t.co/esuKQUQXys

— Chris Skinner (@Chris_Skinner) June 17, 2019

As there is an interesting insight to be gained here. The big one being the amount that Marcus is spending on marketing. According to Ron, it was $80 million in 2017 and double that in 2018. Compared to deposits that’s not a great deal, but even so, it’s an interesting stat.

We then went off into a loans-to-deposits discussion, as Marcus has gained lots of funds on accounts due to their interest rate bribe – higher rates than most other banks for money in your account – whilst their loans rates are running around a fifth of that level, which is not a good bank model.

It’s also not a good bank model to spend millions on marketing whilst offering interest rate bribes to get account openings, as Santander found out. They did this to get market traction in the UK and have successfully become one of our major, mainstream banks, but at a cost of over £1 billion a year.

If you add the marketing budget to the interest rate bribe, it's unsustainable. Santander tried same strategy in the UK. It gained major market share, but at a huge costhttps://t.co/RMQeMnWQKo

— Chris Skinner (@Chris_Skinner) June 17, 2019

In other words, if Monzo wants to catch up with Marcus, their valuation of $1.3 billion in total today is about the same as it’s going to cost them in marketing and interest rate bribes to break the US markets … maybe.

Either way, I wish them success and hope they do get to crack a little of the great American dream. It’s just really hard as Simple and Moven discovered. Mind you, there is a glimmer of light: Chime.  Chime has opened two million online accounts, and is adding more customers each month than Wells Fargo or Citibank. Maybe Monzo, N26, Starling and others targeting the US markets, can learn a few lessons from these players, and change the game. For example, according to CB Insights American neo-banks have gotten four times as much funding in 2018 as they did in 2017, and 10 times as much funding as they did in 2015. In addition,  consulting firm CG42 said in a recent report that it expected the 10 largest American banks to lose $159 billion in deposits to smaller competitors over the next year.

So, there is definitely opportunity for change here, regardless of what some Snarky person feels.