Lending through buy now pay later drives first-ever monthly profits for Monzo

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The soaring demand for buy now pay later schemes, amid rising interest rates and an inflationary environment, has allowed Monzo to record its first-ever monthly profits in the United Kingdom. Monzo, in May 2023, announced that the firm had doubled its revenues to £355.6 million, over the 12-month period leading to February 2023. The significant growth in its revenue comes on the back of a strong lending book and a surge in interest rates.  

Meanwhile, the losses for the firm also declined a tad bit over the 12-month period, reducing to US$144 million from US$147 million recorded a year before. While the pre-tax loss has not changed much over the 12-month period, Monzo is expected to turn profitability next year. The projections are well-backed by the profitability achieved during the first two months of 2023.

• The growth in the business is driven by factors such as diverse and stable inflow of revenue from a large and growing personal and business customer base. According to the annual report, the neobank attracted 1.5 million new customers to open a personal account. This means that a total of 7.2 million customers have registered with the neobank, as of February 2023. The report also revealed that spending by these customers has increased by 38%.
• Monzo is also recording strong growth in its business-focused vertical. Business banking revenues for the firm increased 62%, on the back of robust business customer acquisition numbers. With over 200,000 customers in total, the new registrations increased by a significant 79%.

The lending services offered by Monzo played a pivotal role in driving the growth of the firm over the last 12 months. With consumers grappling with inflation and higher interest rates, the lending volume for Monzo tripled compared to the year before. During the 12-month period leading to February 2023, the lending volume for the neobank reached £759.7 million. The net interest income, on the other hand, surged nearly five times to reach £164.2 during the period.

The growth in the lending segment was driven by the increased use of overdrafts, unsecured personal loans, and its buy now pay later service called Monzo Flex, which was launched in September 2021.

• Lending through Monzo Flex reported strong growth during the 12-month period. Short-term loans extended to customers increased six times to reach £169.3 million, representing over a fifth of its overall book. This is significantly higher compared to the 10% reported a year before.
• This trend is projected to further continue over the next 12 months, as demand for short-term credit remains robust among consumers, especially in the current macroeconomic environment.
• Amid the growing loan book, Monzo is also expecting its credit losses to grow alongside. As it continues to focus on consumer lending and build its Monzo Flex service for the long term, the firm has increased its provisions against bad loans from £14 million to £101 million.

Despite its focus on profitability, the firm is also aiming for expanding global presence to further accelerate its growth. Currently, it is planning for a second attempt to expand in the United States market. Although it is not seeking the growth round just yet, it might consider it going forward, if needed.

The firm last raised US$500 million in funding in December 2021, when it was valued at US$4.5 billion. This is significantly higher compared to the valuation of its competitor in Starling Bank, valued at US$2.5 billion. However, it is much behind Revolut, which was valued at US$33 billion in 2022.

Monzo is not the only digital bank offering buy now pay later services in the United Kingdom. Revolut, in 2022, also launched a flexible payment solution for its customers. Zopa, another British neobank, entered the segment after acquiring buy now pay later provider DivideBuy in February 2023.

Going forward, more firms are expected to enter the fast-growing buy now pay later industry in the United Kingdom, further driving the competitive landscape. The fact that the short-term lending market is crowded and the profits are thin amid the rising interest rate environment also means that more mergers and acquisition deals will take place in the segment from the short to medium-term perspective.

For Monzo, lending including the buy now pay later offering has driven strong growth in the last year. Consequently, PayNXT360 expects the firm to focus more of its efforts on the segment going forward. Furthermore, the Monzo Flex service can also boost customer stickability, providing the neobank with a competitive edge over other digital banks that do not offer buy now pay later services.

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