Customers are moving their money out of Monzo and Revolut over concerns the digital banks are still not managing to make a profit.
Many were attracted by their high-tech apps and speedy sign up process and Monzo and Revolut now have around four million and 10 million global customers respectively. Despite their growing user bases, Revolut’s losses tripled to £106m in 2019 and Monzo’s more than doubled from £47m to £114m.
There is no suggestion customers’ cash is at risk. Deposits held by Monzo are covered by the Financial Services Compensation Scheme, while Revolut has a different way to guarantee savings are protected. However, customers are concerned the challenger banks do not have the staying power of the incumbent high street giants.
Cathal Morrow, 54 from south London, decided to move his money out of Monzo after seeing its latest results. He chose another digital bank, Starling, “because its financial situation seemed far more secure”.
“I really liked that Monzo was doing something a bit different and it was easy to set up an account. But when I read the annual report it made me nervous, so I switched,” Mr Morrow said. Starling is much closer to making a profit. Its losses were £52m last year.
Jordan Edwards, 27 from London, is also concerned about how safe his savings are with Monzo. “The company is sleepwalking into trouble. The platform is great, but I’m concerned about its long-term existence if it doesn’t offer more than just savings, as they won’t make much money from that,” Mr Edwards said.
He said he would move his money to another bank if it continued to make a loss. Of course, Britain’s long established banks are not immune to losses, and several had to be bailed out during the 2008 credit crisis. But their sheer scale and different revenue streams mean they enjoy diversified income in a way the digital banks cannot yet rely on.
Current account switching data does show that the start-ups are gaining ground. Monzon became the most switched to bank at the end of 2019, but the established names still have millions more banking customers.
The London fintech scene
Revolut customers too have been voicing their concerns. Earlier on in the pandemic rumours circulated that the firm was at risk of going bust. Users took to Twitter to ask if their money was safe and whether they should move it elsewhere. Revolut was forced to issue a public statement, which said the rumours were “false information”.
One customer, who asked to remain anonymous, said he moved his money from Revolut to another lender after finding it was not part of the FSCS. This lifeboat fund promises to reimburse customers for up to £85,000 should a financial firm go bust.
Revolut does not yet have a British banking license. Instead it safeguards customers’ funds by holding them in ring-fenced accounts with other lenders.
“I work in banking and even I had no idea my money wasn’t FSCS protected. Revolut says it’s safe but I’m not sure how easy it would be to get my cash back if something went wrong,” the customer said.
Monzo and Starling are signed up to the FSCS.
For those who have invested in the digital banks, the poor financial results are even more concerning. Felix Milton, 25 from Devon, is a Monzo user and invested £2,000 in the company via a crowdfunding round in 2018 – the maximum possible at the time. He said he had given up hope of getting this back.
“My three younger siblings are mad about Monzo and invested the maximum amount as well. I think we’ll all lose our money,” Mr Milton said. “If they can’t make a profit soon one of the larger incumbents will quickly catch up. I also have accounts with Halifax and Lloyds – both of them have really improved their apps which now give me instant spending notifications like Monzo.”
Mike Hampson of Bishopsgate Financial, a consultancy firm, said: “Investors will only get a chance to cash out at a future financing round when the values of the companies may well have fallen – as Monzo’s did in the last round,” he said.
Customer growth of digital-only banks
Adam Davis of 11:FS, another consultancy for banks, said: “It’s likely that customers will have only had a short relationship with their challenger bank and only known them through the good times, so it’s natural to be worried.” However he added that the popularity of Monzo’s new paid-for account and Starling’s profit forecast for the end of the year suggested digital banks could be successful.
From October 31 Monzo will also introduce new fees for customers taking cash out or ordering a replacement card. Replacing a lost card will cost £5 and withdrawals adding up to more than £250 over a 30-day period in Britain or Europe will incur a fee of 3pc.
Anyone who has the paid-for Monzo Plus account or uses Monzo as their main bank account will be exempt.
A Monzo spokesman said: “We remain one of the top banks to switch your account to… and recently were ranked the best bank in Britain for overall service, highlighting just how strong our services and reputation are.” He added that it had recently raised £60m in new funding.
Revolut declined to comment.