Monzo’s £21M Lesson: Due Diligence Growing Pains in the Neobank Era

Regulators Have Neobanks in Their Crosshairs, Underlining the Case for Bought-in Compliance

Challenger banks and neobanks, such as Monzo, Starling, Metro Bank, and N26 have grown significantly in popularity in recent years. Their appeal is clear: easy and swift onboarding, a mobile-first environment, and digital-first operations. However, that rapid growth has come at a cost; all four challenger banks named above have been fined by regulators in the last 14 months for compliance failings. 

Regulators are paying close attention to challenger banks, with some found to have significant failings in their financial crime controls. Banks face a choice whether to buy or to build their compliance infrastructure, and these three incidents validate the business case to buy, for speed and reliability.

The Compliance Growing Pains at Challenger Banks

Challenger banks’ business model prioritizes speed, scale, and customer acquisition. This ambitious growth can come with pitfalls, such as inadequate customer due diligence (CDD) and enhanced due diligence (EDD), weak transaction monitoring systems, and poor governance and oversight. 

The consequences can prove costly for neobanks that fail to put the right safeguards in place. Monzo has been hit with a £21 million fine from the UK’s Financial Conduct Authority (FCA) for serious deficiencies with its financial crime controls. Monzo grew very fast, from 600,000 customers in 2018 to more than 5.8 million four years later. The FCA says that Monzo’s financial crime controls “failed to keep pace” with that growth. Without adequate Know Your Customer (KYC) processes in place, the bank was found to have been onboarding customers with limited or even false information, and unable to comply with a previous FCA order to not onboard new high-risk customers.

The FCA penalized Starling Bank with a £29 million fine in November 2024 for, similarly, failing to accurately assess customers' risk during a period of rapid growth. Metro Bank was also fined £16 million by the FCA for “serious deficiencies” in its anti-money laundering (AML) processes. Earlier in the year, German regulators had fined N26 €9.2 million for the late filing of suspicious activity reports (SARs).

Why Are the FCA and Other Regulators Cracking Down on Neobanks?

In 2022, the FCA conducted a wide-ranging review of neo and challenger banks following its National Risk Assessment of money laundering and terrorism financing (the NRA). The review found that challenger banks often lacked risk-based AML frameworks; onboarding processes were often too fast with insufficient CDD and EDD; and noted the high volumes of SARs, a potential sign of poor initial screening. Often, SARs were inadequate.

The FCA made a number of recommendations, including enhanced customer risk assessments (CRAs), better CDD and EDD, more effective transaction monitoring alert management, and more accurate SARs filing. The FCA made it clear that it expects compliance to scale with growth for these expansion-focused challenger banks.

Beyond the financial damage of a fine for compliance breaches, challenger banks risk reputational damage; no aspirational brand can afford to have its name associated with financial crime. Customer trust is a key differentiator in a competitive sector like finance.

Build Versus Buy: Why In-House Compliance Tools Often Fall Short

Challenger banks have faced a key decision - whether to build their own compliance framework or buy in expert technology. The drivers for building compliance in-house often include perceived cost savings and a desire to customize tools. 

However, the reality is that in-house tools take time to develop and are difficult to scale. They can also lack the regulatory-grade testing and adaptability required to be meet fast-evolving compliance requirements. Building in-house comes with unpredictable timeframes and costs, unlike buying in a solution, when go-live is forecastable and a supplier is accountable for making it happen.

Furthermore, internal teams may lack AML domain expertise that external experts can provide. Suppliers will offer regular recommendations, enhancements, and upgrades, while a company building a proprietary system will have to keep up with developments themselves.

The Case for Buying for Buying Compliance Solutions

Turning to specialist vendors comes with several benefits. Solutions are faster to deploy, so challenger banks can be compliant sooner. And that compliance will be future proofed as the most reliable vendors will continually adapt their products to new regulations, such as evolving sanctions rules, or updates across jurisdictions worldwide, such as those from the Financial Action Task Force (FATF), without the bank’s compliance team having to follow law changes and update systems themselves. This enables them to focus on innovation while staying compliant worldwide.

Vendors build in best practices and provide regular updates to ensure the smooth running of their technology. Turning to a vendor can reduce the long-term cost of ownership and allows banks to stay at the forefront of technological innovations like Agentic AI, which enables operational efficiencies in compliance. In this way, technology is a critical productivity tool as the demands placed on compliance teams grow ever more complicated.

Overall, the risk of failure is reduced significantly when working with external experts and is a more future-proof option.

Conclusion: Growing Fast, Reducing Risk

As some high-profile neo and challenger banks have found to their cost in the last year or so, compliance is not an option; it is an existential requirement. Challenger banks cannot afford to treat AML as an afterthought while enjoying rapid growth, and regulators across the world have demonstrated that they see challenger banks as a weak point in the fight against financial crime.

For fast-growing fintech firms, investing in a proven compliance solution is not just safer; it is also smarter, as it enables compliance to grow in step with the company and prevents growth from outpacing controls.

Ready to learn more? Download Fenergo’s Buy vs Build guide to learn how off-the-shelf Client Lifecycle Management (CLM) solutions can drive faster time to value and regulatory compliance.