As Starling fights back against losses, Monzo and Revolut sink further into the red
It is a sign of the progress of IT’s embedding in the financial market, that within 14 years of the infamous queues forming outside Northern Rock, conversation has shifted from bank runs to app runs, as clients weigh up an unprecedented selection of banks at their fingertips, built to suit their needs for saving, lending, or increasingly, investing in Cryptocurrency. At the forefront of this offering are the triumvirate of Starling Bank, Revolut and Monzo, yet their fortunes to date are divergent, and their futures uncertain.
The battle for app-based banking supremacy straddles disruption and adaptation – Revolut and Monzo are banking on a new form of private wealth management that incorporates digital in every form; Starling Bank on adapting to the demands of the traditional banker by leaning on loans in a low-interest rate market. The former risks arriving too early to the wrong party, the latter too late. Currently though, Starling Bank is winning that bet.
Starling Bank registered a 600% increase in revenues since the 2019 financial year, jumping from £14 million to £97 million, and cutting their losses from £52.1 million to £23.3 million. On current form, the bank should post its first profit in 2022. The opposite fortunes consume disruptors Monzo and Revolut, whose losses appear to rise exponentially with each financial year. Accordingly, these apps face different obstacles on their way to long-term survival.
The challenges facing these apps go deeper than balance sheets, and towards philosophical questions about what the future of banking may be. Revolut for example, is pivoting toward foreign exchange and stock market services for its customers – which is causing the app to take on heavy losses in the short run. Meanwhile, its offering in the cryptocurrency market risks spooking regulators – who are increasingly wary of financial fraud from those avenues – just as it plans to apply for UK bank status. Monzo is more dire still, its CEO stating in July 2020 that COVID-19 had led to ‘significant doubt’ about their ability to continue ‘as a going concern’. They lost 14.5% of their market share in 2020, primarily at the hands of Starling Bank.
This appears to be in part due to an emerging generational divergence that may continue to move in Starling’s favour. The bank has older, higher paying, more loyal customers. Its boom during Coronavirus may well elevate it to the top table of banking companies, as businesses and individuals feel security in investing their wealth with the bank. Conversely, incumbents like Monzo and Revolut may struggle to emerge from their reputations as something of a pocket money club – led by low-income millennials and gen-Zers who are more digitally literate and keen to strike big in the stock market. It is a romantic idea, but one built on a future that may be too far away to achieve profitability.
Timing, though, may not necessarily work in Starling’s favour either. Impending interest rate increases from an overheated economy increase the risk of customers failing on loans. Starling’s growth – aided in large part by Government intervention schemes like CBILS (Coronavirus Business Interruption Loan Scheme) – might prove to have occurred from a foundation of sand if large swathes of companies fail to repay. Interest rate increases have also yet to take place in the age of the cryptocurrency market. Another increase in rates to ward off inflation – particularly as national debts rise – could see customers put their finances behind more scarce forms of money; a regulatory reassessment in favour of cryptos would accordingly tip the scales back in favour of Monzo and Revolut.
App-based banking soared as its customer base became younger, and more financially literate. This is a potent mix for the future of finance and wealth management; the allied growth of cryptocurrency underscores the youth-led strategy of the currently flagging Revolut and Monzo. However, growth also requires a stockpile of savers and consistent revenue streams – a feat proving easier for those pursuing more traditional means of banking than those looking to the future.
The expectation is that Monzo and Revolut will ride this wave of COVID-led disruption. The reintroduction of hospitality and event-led industries to the economy in 2021 will attract a young crowd back to the market, in turn increasing their day-to-day balance sheets. Fingers will then be crossed amongst disruptors that a long-term agreement can be made between cryptos and regulators, thus heralding in a new era for home banking. Soon, we may see a thriving market that caters to both the traditional banker, and the new one.