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  • Writer's pictureJoel Beeby

Champion Challenger Bank Monzo Closing in on IPO

Earlier this year, Business Insider reported that investment banks were falling over each other in a bid to secure a role in Monzo’s prospective blockbuster IPO. Founded in 2015 by former Starling Bank employees, Monzo has disrupted the highly concentrated UK banking market and grown at an astronomical rate since.

CEO TS Anil had previously claimed that Monzo was looking at raising funds through an IPO in 2023. This was at a time when interest rates sat at historical lows and tech valuations climbed to, in hindsight, unsustainable highs. These conditions were ideal for the fintech firm and enabled them to complete a fundraising round that valued them at £3.7 billion.

A key competitive advantage for Monzo is its ability to organically attract customers (90% join through word of mouth), which has led to its UK customer base growing twofold since January 2020, up to 7 million. Monzo’s May 2022 annual run rate indicated revenues of £270 million, which would mean a 75% increase. The bulk of its revenue comes from fees and commissions, so transaction volume is a key growth metric rather than balance sheet size, highlighting the contrast in business models between the fintech challenger bank and its traditional commercial counterpart.

Now Monzo is cash flow positive and on track to become profitable by the end of this year. Plans to grow its lending platform have coincided with rapidly rising interest rates, offering a welcome boost in margins for the blossoming division. Financial Statements for 2022 show that a 200-basis point increase would increase net interest income by £64 million. The UK base rate has increased by 3.5% between then and now.

Monzo was set up with the vision of becoming a financial marketplace free of the risk management burdens associated with maturity transformation. This strategic change in the face of large losses shows nimble, reactive decision-making from management, which has paid off.

However, the macro environment harms Monzo in other ways. Increased discount rates on valuation and a worryingly inverted yield curve signalling a recession in many developed countries will lead to more conservative IPO valuations. As explained, Monzo has turned its financial performance on its head and raised significant sums so it will not require an IPO to fund operations; it has the option to wait until conditions are more favourable.

The wait will be short. Senior management comments and annual reports show that the company is pursuing growth at an aggressive rate, which includes growing its presence in the massive US market. To scale further, the firm will need easier access to capital markets and further injections of liquidity for investment.

Private market valuations are tough to gauge with limited data and often lag public market valuations. However, as an indicator, competitor Starling Bank’s valuation was cut last year by 40% while expecting a record pre-tax profit of more than £120 million this fiscal year.

This comes during a particularly challenging period for the City of London as it fights for relevance as a global hub for equity capital markets. There have been several high-profile criticisms about the City’s lack of international competitiveness, with stock valuations significantly lower than New York listings. Both CRH and Arm, potentially having a combined valuation of $90 billion, have recently ditched the London Stock Exchange in favour of the US.

While a higher interest rate environment will help foster growth for the UK’s neo banks, related IPOs will remain highly anticipated.



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