Today the British challenger bank Monzo raised $475 million and obtained a new valuation of $4.5 billion. The bank is gaining both business and personal account holders at a rapid pace but has continued to report losses. So I talked to Thish De Zoysa about it. Thish is the founder of the gift card company Their Perfect Gift. This fintech is very similar to a challenger bank, but by selling gift cards and offering additional services for these cards it’s been operating as a cash flow positive company.
Thish often talks about how the other challenger banks are giving away money to gain customers and that’s why they’re posting large losses. He calls it “giving away free money”. Of course, that’s normal for startups that plan to monetize later. And we both had some thoughts about how challenger banks might do that. I brought up the premium account services that Monzo and other neobanks offer as one way to monetize. Then, Thish mentioned a new Their Perfect Gift feature that I didn’t know about before. Their Perfect Gift has software that can classify transactions. This feature helps customers with budgeting. The unique thing about the software at Their Perfect Gift is that it can classify transactions in linked accounts at gift card holders’ other banks.
Classifying transactions is a big challenge for fintech programmers. The bank receives a report that tells you the business category for the retailer, not each individual item on the receipt. And retailers like Tesco, Wal-Mart, and Kroger sell many different products from multiple categories at the same stores. So classifying transactions correctly is a major technical achievement, and that’s why other neobanks offer this feature as part of their premium service tier for customers who pay a monthly fee. But Their Perfect Gift offers it to all of their gift card holders.
The fintech founder also warned me about another way that neobanks might try to monetize their customers’ transactions. I figured that they’d do it by adding premium service tiers, but many people use the free tiers of neobank services. And neobanks could lose customers if they forced all of them to pay a monthly fee on each account. But Thish also mentioned that financial apps might do what social networks and other startups were doing and start selling customers’ data. If a neobank is losing money on its regular business operations and a marketing firm, or a hedge fund, offers to pay it for access to its customers’ transaction data, that might be a tempting offer for the fintech.
Thish also told me about the other services that Their Perfect Gift offers. This gift card company sells gift cards that can be used anywhere, but it also operates its own marketplace that offers discounted products for sale. I’ve brought that up before, but it’s definitely good for margins. After all, it’s similar to what department stores like Hudson’s Bay do with their store credit cards. Today, I also learned that Their Perfect Gift also offers discounted hotel rooms. Gift card holders can reserve hotel rooms at prices below the rates on hotel comparison sites, according to Thish. Of course the pandemic is still ongoing, but the tourism sector is starting to recover and when it does Their Perfect Gift will be ready to capitalize on the opportunity.
The other Perfect Gift card service is a 3 percent cash back offer on the gift cards. A portion of the cashback money is sent to charitable organizations. This is an upcoming feature that should be available soon. And as Thish explained, even if the hotel discounts aren’t as appealing during the pandemic, everyone still needs to buy groceries and the cash back offer will help them with that.
So Their Perfect Gift has three additional ways to earn money from its gift cards. It earns money when gift card holders purchase discounted products from its retail store. It also earns commissions when gift card holders reserve hotel rooms. And the cash back offer encourages card holders to use their gift cards to shop at retail stores, and the fintech may also collect a commission on those purchases depending on how the offer works. Because of these programs, this fintech has positive cash flow while its competitors are reporting large losses. Like Thish has explained before, Their Perfect Gift has not raised hundreds of millions of dollars (or pounds) in venture capital funding like its competitors have done, so it has been forced to come up with a profitable business model.