Revolut versus Monzo: which fintech star offers the better investment?
Big money is bankrolling two of Britain’s biggest fintech companies, Revolut and Monzo, and these investors will want an 'exit', a sale of their stakes to the public. For ordinary investors, which of the two seems likeliest to provide the best returns?
Time was when banks had names such as Chase Manhattan, Societe Generale and National Westminster. In those days, mention of “Revolut” would have conjured up an image of a retro brand of Russian vodka, while “Monzo” would have been assumed to be a fashion brand or a nightclub.
No longer. These are two of the hottest fintech propositions in the UK, signing up a (mainly) younger customer base for banking services that fulfil all three of the Millennial generation’s requirements: instant, easy to use and free.
Heavyweight investment firms
True, some services attract a fee, and we’ll come to those in a moment. But the basic principle for both services is that the customer doesn’t pay.
These two banks are, in some ways, the most visible fruits of the UK regulator’s encouragement of financial innovation. In contrast with supervisors elsewhere, Britain’s Financial Conduct Authority (FCA) has not only been supportive but has provided fintech entrepreneurs with a virtual “sandpit” in which they can test new products and services that would not currently be permitted to be offered to the public.
So, from an investor’s point of view, which looks the better bet – and when can he or she expect to be able to put their money where their instincts are?
Well, both banks are backed by some heavyweight investment firms and venture capitalists, and there is nothing to stop the small investor offering themselves as junior partners to these organisations. But in all honesty, unless they have substantial funds, they are likely to be met with a polite refusal.
A somewhat crowded field
So, let’s look at it from a different angle and try to assess the relative prospects for the two banks by seeing what sort of businesses their backers have previously nurtured and then taken to the stock market. Revolut’s lead backer has been Moscow-based DST Global. Its list of “exits” is indeed impressive and reads like a who’s who of the 21st-century tech boom: Twitter, Facebook, Alibaba Group and Spotify.
Other backers include Ribbit Capital, Lakestar and advisory firm GP Bullhound.
Monzo’s fund raising has been a little less orthodox – or you could say it has been closer to the orthodoxy that you find round Shoreditch, central London’s hi-tech hub. It was initially “crowdfunded”, not only by small investors looking to get in on the ground floor but even by its own customers.
In December 2018, Monzo announced it had raised an extra £20m in this way. But come 2019, and Monzo was seeking a new round of investor funding in a more conventional manner. In June, it announced that £2bn had been raised from investors led by Y Combinator, the US investment firm that had backed Airbnb and Dropbox, again names that are inextricably associated with the recent boom in disruptive and sometimes revolutionary tech firms.
When our two banks come to market, the big questions will, obviously, be: is Monzo a good investment or is Revolut a good investment?
Of course it is possible that both – or neither – will prove to be a wise home for investors’ money. But while it is hard to forecast whether both could disappoint, it is easier to predict that one or other will probably come out on top.
This sort of tech-based, mobile-based banking may be a very young industry but already it is becoming a somewhat crowded field, not least because the established banks are throwing money and technology in this direction in an attempt to catch up. There will be a limit to the growth of the industry, after which consolidation looks likely to set in.
The best analogy is with the car industry which, in its early days, was scattered across dozens if not hundreds of small firms and workshops, before today’s giants emerged.
So, how do our two contenders shape up?
Yet to make a profit
First, the case for Revolut investment.
In some ways, Revolut has a head start. For example, Monzo is still looking at ways to offer share trading to its customers, while Revolut already does so. Indeed, it has extended this facility from premium to standard customers, essentially offering free share dealing services, although there is a small custodianship fee.
Revolut has the slightly staider, more stolid image, although that does not stop it from using the relentlessly upbeat language of the tech revolution: “We’re here for those who refuse to settle. Who never stop moving forwards. Who continue to search for new ideas and better experiences in everything they do.”
The co-founders have solid backgrounds in conventional financial services. Vlad Yatsenko “spent 10 years building financial systems at tier one investment banks”, while Nikolay Storonsky “was a trader with Credit Suisse, where he experienced at first hand the astronomical fees applied to foreign exchange transactions”.
The case for Monzo investment must start with the great loyalty of both its customers and its crowd-funders – as mentioned earlier, they are often the same people. To describe Monzo as a cult would be unfair, but it has been compared with a club, with its coral-pink bank cards signifying membership.
It takes a less conventional approach to doing business, with chief executive Tom Blomfield telling Wired magazine in February this year that: “We have to be profitable and sustainable. But you also need to think about our impact on society and environment.”
He added that he wanted Monzo to serve “people who don’t have a passport, people who are homeless to people who have just come out from prison”.
After a spell as a management consultant, Blomfield has been involved entirely in new financial services, founding Go Cardless (like Monzo, it was backed by Y Combinator) before moving to Starling Bank, now a Monzo competitor in pretty much the same space.
Should you invest in Monzo, or should you invest in Revolut?
Before investing in either, you need to know that neither has yet made a profit. That is not necessarily a problem, as many a tech firm has had to “swim through the whirlpool” of years of deficits before emerging, triumphant, on the other side.
But remember that these are businesses that continue to attract competition, however diminishing seem the likely returns.
Ultimately, once the technology is sorted out and the “user experience” in technological terms of both banks is more or less equivalent, the big question may well boil down to atmospherics.
Are more potential customers likely to be attracted to Monzo’s slightly-offbeat “communal” model? Well, possibly. Apple products have had a devoted following for many years. But then, so did now-vanished phone company Orange.
Perhaps they may prefer the more mainstream (despite the name) Revolut. But being mainstream is no guarantee of success either. Remember ITV Digital at the turn of the Millennium?
Ultimately, we won’t know the winners in on-line banking until the results come in. But with two such different entities and Revolut, perhaps instinct is the best guide for the investor.
FURTHER READING: Revolut speeds up US expansion with Mastercard deal
FURTHER READING: Monzo plans a hiring spree and to relaunch paid-for accounts