Monzo is getting into business accounts. The challenger bank has just launched its first offering for businesses as part of a wider move in its race to start making money.
It's an important step for the challenger bank, which aspires to be profitable in the next two to three years. But it is just one of several revenue-generating plans in the works: from a US launch to a revamped second attempt at a premium account feature. However, convincing small businesses to make Monzo their primary bank could be the ultimate profitability shortcut.
So how do the accounts work? Small businesses and freelancers can apply for two options: Business Lite, which is free, and Business Pro, which costs £5 a month. “The first 50,000 customers will be at the micro end of the spectrum,” says Tom Blomfield, founder and CEO of the challenger bank, referring to sole-traders, micro SMEs, and small limited companies.
British business banking had a surge last year, after the Royal Bank of Scotland bankrolled a £775 million fund to help challenger banks develop their business banking offering. The fund was part of the conditions for the £45 billion government bailout RBS got after the 2008 financial crisis – but Monzo wasn’t one of the banks to benefit. Metro Bank was the big winner with £120m, Starling Bank got £100m, Clear Bank got £60m, and Nationwide Building Society received £50m.
“We applied and we were not selected,” says Blomfield. “It was disappointing, but we were still determined to get our business accounts live. The result of not getting that funding meant that it’s just taken us a little longer.”
Even without the fund, there are many reasons why Monzo wants to get into small business banking. “That scheme is just one of the drivers,” says Mike Kennelly, director of PwC open banking and digital transformation. “There is opportunity there anyway.” The key difference between retail banking and business banking, is that, with the latter, people are willing to pay for it.
“If you put investment in this area, you’ll likely get it back,” Kennelly says. “There’s also recognition that small businesses have been poorly served from a digital perspective; it’s a community that hasn’t been prioritised until now.”
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Blomfield isn’t convinced that big banks will having a fighting chance in the digital space anytime soon. “The competition from the big banks is woefully poor,” he says. “They say they’re investing and catching up, but it will take them five or six years to get to the point that Monzo and Starling are at today.”
And, for that reason, the big-name incumbents are the banks Monzo is interested in stealing business from – not its digital-first brethren. “Starling and Tide’s offerings are both good, and I think we would be mistaken if we were trying to steal market share off each other,” says Blomfield. “Overwhelmingly we’re targeting businesses who bank with legacy high street banks, who offer a level of service that isn’t really up to scratch in the 21st century.”
It wouldn’t be the first time digital banks upset the incumbents. Last year, Monzo and other challengers were blamed for an extreme decline in high street banks’ reputations. Kantar reported a collective £1.6bn loss in brand value for eight biggest players in just a 12-month period: while Monzo’s net promoter score stuck at a comfortable +80 compared to HSBC's -14.
It’s a classic struggle. Big banks may be treating their small business customers poorly, but they have customers who know and understand their brands. “Monzo and Starling are effectively starting from scratch,” says Kennelly. “If you’re an established SME business, you may not have heard them, they’re very new banks.” He’s right, according to YouGov, while 40 per cent of people have heard of Monzo and 46 per cent of Starling, 98 per cent know HSBC.
Big banks’ heritage holds them back elsewhere, however. “The incumbents are still reluctant to get partnerships involved,” says Kennelly, “and therefore there is still a reluctance to get innovative fintech solutions integrated into their offering, which ultimately will be a weakness.” Monzo, on the other hand, has included accounting software Xero in its Business Pro package. “They see partnership as a means for scaling their business,” says Kennelly.
“That’s an advantage, but not a unique advantage,” says John Lyons, who leads PwC’s retail and commercial banking consulting practice. “The SME business sector will be busy, so they’ll still need to differentiate. Kennelly thinks: “they’re going to have to champion a particular sector to be successful.”
Starling Bank has maintained a female focus since its launch, from championing women in finance to hosting women in business events. But what is Monzo’s niche? Blomfield seems to be targeting freelancers. A key feature in Monzo’s Business Pro account is Tax Pots, which calculate and set aside the tax that freelancers need to pay based on their annual income – something that sole traders often need to hire an accountant to deal with. As with most of Monzo’s features, this is well thought out and centred around the needs of the customer – the only difference is that the Monzo Business cards won’t be pink.
This article was originally published by WIRED UK
