In Land Of Free Banking Apps, Red Ink And Investor Support Only Go So Far

When is a business model less than a model business?

When red ink stretches in waves far as the eye can see.

Red ink might be OK for startups. It is OK for firms that have seed capital, that anticipate growth in sales that need to support staff and machines and servers … ‘til scale comes into play, and red ink turns black. At least that’s what investors were told.

For investors who have poured funding into startups both here and across the pond, those swashbuckling FinTechs that promise to improve on business practices that have extant for centuries — moldy in some cases, inefficient in others and man, those fees! — the iron might seem red hot for a strike against traditional banking models. After all, the biggest of the big banks have seen their own share of woes, beset by historically low interest rates that crimp margins and the reliance on fees to offset that impact.

In Europe, there are other issues with which financial firms must grapple. Interchange fees are capped there, of course, limiting the amount of money that can be gleaned from transactions via personal payments cards. The giants suddenly seem vulnerable, too, where technology is concerned, slow as they have been to adopt and adapt to the changing ways we transact, eschewing the bank branch in favor of the mobile phone screen.

So, for the smaller — ostensibly more nimble — challenger banks, red ink is OK, then, until it’s not. And business models that attract loads of capital in hopes of the next “big thing” built on a grand theme — think “free” well … anything … for consumers — are OK too. Until they are not.

The “not” may be in the cards for digital-only banks that have a one-trick pony, a single arrow in the quiver, a lone bullet in the chamber and here we are talking about prepaid cards as the weapon of choice, to name just one example.

Exhibit A is Monzo, which got a double whammy of sorts this past week, in terms of financial news and operational snafus.

Monzo, you may recall, is a challenger bank in the United Kingdom, looking to displace some of the traditional players in banking and payments. The company makes its home in personal finance, having garnered a full banking license earlier this year, meaning it can offer a suite of account options via mobile app. But it is prepaid that dominates, for better or worse. Consider the latest results posted earlier this month by the company, which showed that for the year that ended in February 2017, net losses came in at roughly $8.6 million, far outpacing the $1.8 million for the previous year.

The prepaid division, said the company, had what management termed a “fantastic” year, with 240,000 accounts funded, at roughly $320 million spent in the aggregate. The losses come out to be $64 per customer per year, driven by costs that come in tandem with use — namely tied to international ATM use.

One headline trumpeted news that Monzo is paying a “high price for popularity,” as the red ink shows. The aim may be, as CEO Tom Blomfield has stated, to bring the prepaid audience over to its eventual current account products — and that is a big if, even amid the 5 percent weekly growth in customer transactions and 7 percent transaction volume growth. Consider that there are only 50 current accounts active, and the goal is to have those accounts be extended to all prepaid customers through the summer.

“If we continue to grow at this rate, we will hit somewhere between 500,000 and 800,000 accounts by the end of the year,” he said to Finextra. “To continue to offer the level of support we aim for, we will need to significantly expand our team; we’re looking to bring on around 40 new customer operations staff in the next six months … Having built direct connections into Mastercard and Faster Payments, our unit economics will improve dramatically once customers move to the current account,” he added.

(As for ATMs, does anyone remember when N26, the German startup, closed 160,000 customer accounts because the account holders were making numerous ATM withdrawals, which caused costs to balloon?)

Monzo also experienced a brief outage this week that also left users unable to pay for things, as the cards were being declined, but that issue was fixed — a temporary reminder that he or she who lives solely by mobile app may be inconvenienced by apps, on occasion.

Monzo is one of a host of firms that want to challenge the way banking is done, via cards and other offerings.

That roster includes Ffrees, which has offered a prepaid card, Soldo, focused on multiple users sharing an account (and is aimed at parents looking to shape and monitor kids’ spending habits). There’s also Atom (focused on mortgages), Tandem (banking with a focus on millennials) and Starling, with relatively broad service portfolios. Atom has said it will need three years to break even, having lost more than £22 million on an income of £46,000, it was reported earlier this year.

No surprise that all of these firms have gone to the well of venture capital raising — which will likely happen after the next 12 months, and thus sometime during 2018. The problem is, what will the capital raising environment look like then, in an increasingly well-populated market dominated by “free” models that are sticky, and, oh, as Brexit stares us all in the face (and c’mon, no one really knows how this momentous shakeup will hit FinTech)?

Free is the operative word, at least for now. But one way or another, free has a cost, financial and otherwise — and the otherwise is what may ward off investors, current and future, if fickleness reigns.