App-Only Banks Rise in Europe and Aim at Traditional Lenders

Last year, Monzo’s losses quadrupled to £33.1 million. The company is developing a marketplace where customers can shop for financial services offered by other firms, with Monzo collecting a fee. In the meantime, it makes some money from overdraft and A.T.M. charges, and is experimenting with giving out short-term loans of up to £1,000.

As they expand, these start-ups will also face more regulatory scrutiny and targeting by fraudsters. Traditional banks must ensure, for example, that a certain proportion of the deposits they hold are kept in reserve, as a safety net. Such policies help guarantee that a bank will not lose its customers’ money, but they make it harder to turn a profit. Now that Monzo holds customer deposits, it must also meet these requirements.

Start-ups also have to fight inertia. People rarely change banks, whether because of an existing mortgage or the headache of updating a Netflix account. Less than a quarter of Monzo’s customers deposit their paychecks into their accounts; most use it as an add-on, to take advantage of perks like cheaper foreign exchange transactions. Even Mr. Stevenson, who does his day-to-day banking with Monzo, had to go to another local lender to refinance.

“The big question is, will millions of people switch their primary transaction accounts, where their checks get deposited and where they pay their bills, and do their key transactions,” said Hans Morris, a former executive at Citigroup and Visa who now manages Nyca, a New York venture capital fund. “If you’re making a historical bet, you would say that they aren’t going to switch.”

At the same time, traditional banks are adapting. JPMorgan is testing a mobile-focused banking service called Finn, which offers savings and budgeting tools similar to those of Monzo. Goldman Sachs has introduced Marcus, an online savings and lending product that has more than 1.5 million customers.

Mr. Blomfield is confident his company’s young customer base will eventually turn to Monzo for other, more lucrative, financial services that it intends to eventually offer.

Monzo plans to announce in coming weeks that it is raising about £100 million, at a valuation of more than £1 billion, according to two people familiar with the deal. The deal will make it one of the biggest start-ups in Europe, and Monzo will use the funds to help enter the United States as early as next year.