Investing in Monzo, and what you could consider instead

5 December 2018

I invested £100 in Monzo, but I don’t think it’s a very good idea.

Challenger bank Monzo achieved its goal of raising £20 million in under three hours, one of the biggest and fastest rounds of fintech crowdfunding in the UK ever.

In the days leading up to the opening of funding I had many friends get in touch asking my opinion on it as an investment.

And my simple answer was, don’t do it.

Getting millennials to engage with finance is a bit of a holy grail for financial firms. Financial providers clamour for their attention. After all, many 25-35 year-olds are finally coming into a bit of cash and wondering what to do with it.

Monzo has an ace up its sleeve when it comes to engaging with young people. It happens to be a very popular bank, with a very active online community.

Its customers zealously praise its benefits and routinely take to social media to remind everyone as such (try typing “Monzo” into Twitter search and you’ll see what I mean).

I myself have been a customer of the bank for over a year. I had one of the cash cards, which was “transitioned” into a current account earlier in 2018. When it announced a round of investing my interest was piqued.

The idea is intoxicating – a fresh-face squeaky clean challenger that is tearing up the rule book of the banking industry and actually has customers that express something other than indifference?

At only three years old the provider has grown astronomically, increasing its customer base from under half a million to more than 1.2 million in less than a year.

Dare some call it the “Apple” of banking? It is certainly tempting.

Imagine if someone told you they had a time machine and you could go back and buy shares in the tech firm in 1983? You could pick up a share for 79 cents. At the time of writing Apple shares cost $176.69. That’s a 22,265% return on your investment.

Could Monzo prove to be a similar golden-egg-laying goose? Perhaps, but there are some important things about the firm that make me nervous.

It bleeds cash. The firm was burning through £2.75 million cash each month up to the end of its last financial year (February 2018). This isn’t necessarily something inherently bad, most start-up businesses do. At that rate it will take just over seven months for the firm to spend all the cash it raised in the latest crowdfunding round.

It also doesn’t have a proposition that is unique. Competitors such as Starling Bank have a very similar offering. And bigger banks are already catching up with the kind of bells and whistles that Monzo offers.

The bank has also openly expressed an interest in selling high-cost loans to start turning a profit.

The last time investors got excited about a financial firm that offered high-cost lending was when Wonga was aiming to float on the stock market for a value of £770 million back in 2012. Today, Wonga no longer exists.

Unlike investing in publicly-listed companies or investment funds, buying Monzo’s private shares is highly illiquid. This means investors who want their money back will have to wait for an Initial Public Offering (IPO), a share buyback scheme, or a takeover of the firm.

Monzo itself admits that it is “possible (although not straightforward) to sell shares privately”.

If you suddenly need your two grand back straightaway, good luck with that.

Going back to the topic of millennials being hard to reach, what makes things so painful for us money hacks is watching things like this happen.

Monzo is able to deftly leverage its customer base into capital funding, while the habit of serious saving and investing goes ignored.

It is so easy to get stuck into investing. Just £50 a month paid into a Stocks and Shares Isa, investing in low-cost funds is tried and tested. Markets have been in a shaky patch of late, but this presents opportunity to people looking to pick up cheap investments.

And it doesn’t really matter either, if you’re starting from £0, because the pound-cost averaging of regular investing smooths out all the volatility.

If you’re not confident about picking your own investments (you should be though because you’ve already taken a punt on a risky one), then consider opening an Isa with a robo-advisor. These firms will invest on your behalf, for a price.

Ultimately, if you’ve taken a punt on Monzo for the hell of it then so be it. You may see your money grow, but you must also be prepared to lose. But if you think putting money into the proposition of an unproven start up is a good place to start a portfolio, you might want to think again.

Myself, I bought £100 worth of shares so I can have the pleasure of attending shareholder meetings and reporting back on this extraordinary company as it develops.