Monzo: aren’t millennials supposed to hate banks?

Ed Monk

Ed Monk - Fidelity Personal Investing

If there’s one thing we’re supposed to know about millennials it’s that they don’t like banks.

If there’s another thing we know about them (all too well in the investment business) it’s that they don’t like investing - or rather they don’t like it enough to prioritise it above their other financial commitments, like buying a house.

How, then, to explain the wild enthusiasm among young people for Monzo, the ‘challenger’ bank which has just raised £20million of funding in three hours, much of it from its millennial clientele?

You’ll probably know it best from the coral pink payment cards it issues to customers. Beyond that, Monzo really is just another bank, albeit one with a very successful social media strategy.

After launching in 2015, Monzo gained traction as a provider of pre-paid cards that could be electronically loaded with money from a bank account and then used for spending, like a debit card. It later secured a banking licence and now offers an overdraft facility.

What’s made it stand out are the tools and gizmos available within its accompanying smart-phone app - the only way to interact with your account. Monzo tells you what you’re spending money on, and what you’re overspending money on. It lets you split bills automatically with other users (who will include all of your friends, naturally) and to withdraw limited amounts abroad for free.

Its budgeting tool allows you to set limits on different types of spending - eating out, say - and pay yourself an allowance so that you don’t overspend. Strictly speaking, none of these features are unique but the consensus appears to be that Monzo does them all better, as well as all in one place.

So evangelical are Monzo’s customers that, along with spreading the word on social media, many rushed to invest up to £2,000 in the company though a recent ‘crowdfunding’ exercise. £20million was raised in just three hours, putting a valuation on Monzo of more than £1billion.

In exchange for the money, Monzo investors get shares in the company but, as an unquoted company, these are not shares that you can sell on public exchanges. Even the shares in comparably-sized companies listed on the Alternative Investment Market (AIM) which are considered relatively ‘illiquid’ in investing terms, have a market to buy and sell into.

Monzo shareholders will instead have to wait for the company to list on a public exchange, or for some other event like a buy-back, to get their money back including any profit made. Normally, investors would demand a high potential return for such restrictions because they effectively add a whole load more risk. But with a £1billion valuation - when Monzo is still loss-making - means that a lot of upside is already priced in.

That said, the worth of Monzo as an investment is not really the point. The point is that these young people are enthusiastically buying a stake of a company that they believe in because they can see it working for them and their friends. It’s a philosophy espoused by Warren Buffett and Nick Train, to name but two. They are looking for a smart use for their money that will yield a return over the long term.

It all suggests they will make very effective investors. What’s less encouraging is that there are, from an investing point of view, far more appropriate homes for their money than one completely undiversified holding in the unlisted shares of a loss-making start-up company.

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