How Digital Challenger Banks Can Survive
I recently read this headline from Business Insider and it sparked some thoughts about the viability of these app-based “challenger banks”. Let’s talk some unit economics, business models, and product feature sets.

The gist of the article:
- Monzo the UK-based app-only bank is hemorrhaging money at £50 per registered user (~£12 million per year for its 240K users).
- “Customer numbers are growing at around 5% per week and CEO Tom Blomfield writes in the report: ‘If we continue to grow at this rate, we will hit somewhere between 500,000 and 800,000 accounts by the end of the year.’
- £250 million has been spent on Monzo’s pre-paid cards to date and transaction volumes are growing at a rate of 7% per week.
- “Around 40% of the per-customer loss is due to international ATM usage outside the UK or EU, with a small minority of our user-base driving the majority of this cost.”
- It has generated less than £200,000 in revenue in its two years of operation.
Business Model & Unit Economics
To be clear, Monzo is not suffering from a demand problem. Quite the opposite — I was #24k something on the waiting list when I signed up last week (and who knows how long I would’ve waited if I didn’t have a golden ticket). The problem is that this is a heavily variable cost based business with (currently) very poor unit economics losing £50 per user. This means the faster they grow, the faster they burn.
Traditional brick and mortar banks have high fixed costs (i.e. physical presence and the associated costs like personnel and property costs) and make their money on liquidity and float which drives loans (interest) and insurance (premiums).
The app-only banks are based on the same business model minus the high fixed costs. But in order to start making money, they first need to get enough users and cash reserves to create liquidity and float. Hence providing the largely loss-making features aimed at user acquisition: friction-less onboarding, contactless debit cards and perks like zero foreign transaction fees and free foreign ATM withdrawals.
Network Effects
What about network effects that can reduce user acquisition costs and drive user retention? It exists to a certain extent in this business — each additional user in a bank drives more liquidity and float which improves the user experience with better loan and transfer availability and rates. Also in the UK, where Paypal and Venmo don’t have strong market shares, P2P money transfers would also benefit. That said, just based on these features, it’s not a winner takes all type of market. In the US for example, there are numerous P2P money transfer providers and people typically are pretty distributed in terms of which bank they use.
Sticky $$$ Features
Revolut, a Monzo competitor, has a “More” tab in its app which has their current and future service features. This is essentially the money making tab and also will be key in retaining users beyond competing on price.

Putting on my product manager hat, here is how I would arrange the features of this app based on user stickiness, monetisation, and differentiation.

If we look at this feature “stack”, the challenger bank game is a race to the top with user retention and monetisation heavily dependent on high switching cost features like wealth management and insurance. Lending/credit business could be sticky but for the most part it’s still competing on price rather than convenience (i.e. lower interest vs bank loans).
“Other” differentiating features include Revolut’s Premium subscription, which for £6.99 per month, the user gets unlimited international transfers, increased ATM withdrawal limit, better support and offers like mortgage deals. If Amazon Prime has taught us anything is that subscription models can be used as a powerful user retention and engagement (in this case up-selling) tool in addition to a consistent revenue stream (because let’s face it, Revolut isn’t going to make the big bucks with £6.99 especially with increased variable cost that comes with the premium accounts).
Superior UI and spending analytics are differentiating features that again makes challenger banks competitive to traditional banks but likely comparable to each other. Analytics has the advantage of generating and keeping the user’s data “hostage” and increases switching costs.
Easy onboarding, contactless cards and 24/7 support make challenger banks on-par (aka “feature parity”) with each other and competitive to traditional banks. The foreign transaction fee features are user acquisition perks and bring feature parity. Both are high variable costs that degrade unit economics and the switching costs are very low.
It’s still pretty early in the challenger bank game and it’s fascinating to see how each player is differentiating themselves through feature sets and marketing. As the market evolves, we will see who can be the best at selling and keeping users on money-making features before their cash runs out.
