Can Monzo avoid the failures that brought down Xinja?
Founded in 2017, Xinja was an Australian digital bank that, due to complications caused by the COVID-19 pandemic, struggled to secure enough funding to survive and eventually exited the sector in December 2020.
Katherine Long, Banking Analyst at GlobalData, states that the bank’s offering above-market deposit rates and not deploying them back as loans was a primary issue, although she also highlighted a lack of focus on revenue-generating activities as particularly problematic:
“Xinja did not prioritise early on trying to create a sustainable future with revenue-generating products, and it was too late when it finally dawned that it needed personal loans and wealth services instead.”
Fighting against unprofitability
Despite taking a leading position in the UK digital-only banking market, Monzo, according to GlobalData, is incurring annual losses of £100m. This is despite managing to raise US$717m in capital to create a new range of products and fuel a potential US expansion.
“By creating a leading current account product that generates practically no revenue, either from merchant or marketplace fees, its business has become an increasingly expensive charitable cause for the UK market,” adds Long.
Current attempts to restrict features on the free account and therefore incentivise the use of Monzo’s premium offerings could be misguided: UK customers show little willingness to pay for banking services in the current economic climate, and US customers legally cannot be charged.
Tom Blomfield exits the company
The founder of Monzo, Tom Blomfield, recently on the grounds of mental health. Fuelled by pandemic-related pressures and a dislike of being at the helm of a company that quickly accelerated past its “scrappy startup” origins in only five years, Blomfield’s exit will make Monzo’s future even more uncertain.
Long concludes that the bank should avoid “trying to sell what was once free” and refocus on its ability to attract and engage its customers. Future development around loans and wealth services to maximise revenue could solve its underlying profitability problems.
“The bank should also learn from the likes of in the US, a company that has given low-income customers the tools to help them manage their money easier on conditions such as using their cards or receiving their monthly pay.”
Image credit: Monzo
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.