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What next for the now-profitable app-based Starling Bank?

Starling bank is the first of the new breed of UK digital banks to make a profit, so where next?

Karl Flinders
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Published: 04 Dec 2020 11:00

Starling Bank can set ambitious targets now its revenues exceed its operating costs, but potential acquirers should know the company’s mission is to change banking and not to sell up.

Receiving its UK banking license in 2016, the app based challenger bank was one of the early cohort of new banks harnessing the latest technologies to take on the traditional high street giants. Last month, it reported its first profit and the first of the UK’s consumer-facing challenger bank community, a major landmark for any new bank and a launchpad for raising the bar.

Starling’s rise is no secret. It is one of the most talked about UK challenger banks under the leadership of charismatic computer scientist and banker Anne Boden.

Recent talk of big banks eying the company up for takeover makes its plans all the more interesting.

Speaking at the Fintech Connect after being asked about the reported interest from Lloyds Bank and JP Morgan, Boden said these are not the first traditional banks to eye Starling’s business.

But she is not about to cash in and is aiming much higher, an ambition shared across the company. “Big banks taking an interest in Starling is not new and I have always said I didn’t do this to sell out to a big bank and nothing has changed,” said Boden.

“We are in a very interesting space, I am excited to be profitable and I am excited about how people view our success, but people that joined Starling did that to do something fundamental and have a mission,” she added. “We are technologists and we are proud of it.”

Read more about Anne Boden

Anne Boden is an IT professional who got into banking: Armed with a BSc in computer science and chemistry, and an MBA, the now fellow of the Chartered Institute of IT joined Lloyds Bank in the early 1980s when, she says, she was “doing fintech before fintech was fashionable”.

After Lloyds Bank her career has included: A period heading up UK IT at Standard Chartered; being one of the original designers of the Clearing House Automated Payments System (Chaps); a role as a strategy and technology consultant at PWC; restructuring European operations at UBS; holding the global CIO for reinsurance at Aon; and running business in 34 countries for ABN Amro and subsequently RBS, when it took over the Dutch bank.

But it was after leaving RBS in 2011 – to spend time working with startups to find out what was going on in financial services outside the big organisations – that she realised how banks needed to change. She joined Allied Irish Bank as COO and began implementing some of the ideas she'd had while working with small fintech groups. This was successful for the bank but Boden wanted more – and realised the only way to get it was by starting from scratch with a new bank. And the time was right to do this.

The £800,000 operating profit for the month October, which appears insignificant in a sector where profits are counted in billions, is a major milestone. “It gives us confidence and allows us to set our ambitions very high,” said Boden.

Despite the economic uncertainty caused by the Covid-19 pandemic and fast approaching Brexit Starling actually became profitable earlier than expected said Boden. “We have been planning for this mist of the year and we knew we were going to do it by the end of the year. There was a bit of a hiccup when the coronavirus hit when for a few months we didn’t know how it was going to impact us.”

But the impact of the pandemic has seen more customers arrive and the use of its services increase. “What happened is there has been a huge move to digital because people want a digital experience and we hit profitability just ahead of schedule,” she said.

The company has not furloughed any staff and actually hired 150 since the initial lockdown.  Software development continued during the lockdown. “We are constantly adding new features. It is not just about gimmicks, but doing useful things for customers with engineers releasing software all the time,” said Boden.

Are we tech or finance?

But what is next for the bank set up by a computer scientist to use modern technology to make banking as convenient as possible?

One thing is for certain, the company will continue to preach tech. “I started my career in the early 1980s as a computer scientist, and I saw the bank and the industry was all about data and computing,” said Boden.

She also realised to gain trust and grow in the banking sector consumers need to be reassured of banking credentials before worrying about the digital services on offer.

“We have always used the word bank in our name and we have never tried to anything different, which is why we are trusted by our customers. But modern day banking is all about technology, which is why when I quit my job I wanted to set up a bank with technology at its core,” said Boden.

Boden expects all banks to face a dilemma over their status in the future, as tech’s importance in banking grows ever greater. “I think in the future all banks will end up being considered far more as technology stock,” she said, adding that banks are not glamorous at the moment and investors look at them as being hard work, at the same time acknowledging there must be a balance.

“Technology currently has all the glamour, but I am a realist and the only way you can make money and have a sustainable business is if you are a bank and you have the best technology in the world. That is what we set out to do and that is what we are doing.”

Read more about Starling Bank

  • Thousands of people are downloading Starling’s app every week as the bank builds its customer base.
  • Challenger bank Starling opens its API up to developers in hackathon at Google’s London Campus.
  • Starling Bank founder Anne Boden relates how her time with startups outside traditional banking convinced her to build a digital bank from scratch.
  • Starling Bank, which will offer smartphone-based current accounts, has been given a UK banking licence.

The bank is certainly rubbing shoulders with its centuries-old competitors. It was involved in the government-backed business lending scheme, where the banks provide the capital, but if there is a default the government makes good.

“We were in a good position to help out with this because we had the funding through £4bn in deposits and we had the technology to support this, because we had spent several years building lending systems,” said Boden.

Starling has lent about £1.2bn to date through the scheme, and being part of it gave its reputation a boost. “It has established us as a bank that is competing against the big banks,” she said.

Like big banks, international expansion is in the plan and its European strategy has started. Starling is currently a UK-only bank, so won’t be as suddenly impacted by Brexit, but must plan for it.

“It is very unfortunate where we find ourselves today with Brexit,” said Boden. “We have never marketed ourselves outside the UK so we are not in the position some banks find themselves in, having to get an overseas license quickly.”

But for its European expansion it now needs a license and is going through the process with the Central bank of Ireland.

After a pause in its European expansion projects when Covid-19 struck, the bank got them going again as soon as August. It is currently “having conversations in France and Germany”, said Boden.

Read more on IT for financial services