How Starling beat Monzo to profitability

The last twelve months have been rather good for Starling Bank. While its flashier rivals have struggled during COVID-19, Starling is now profitable, one of just a handful of FinTechs to achieve this feat. It has also strengthened its claim to be Britain’s best bank, having topped Which?’s latest best and worst banks list. But Starling now finds itself at a crossroads. What path will it take? And can it keep its edge?

Anne Boden, Starling’s enigmatic CEO & founder, has talked about wanting to float her bank, but it’s also clear that Starling is on the shopping list of some financial goliaths. Both Lloyds Banking Group, the UK’s biggest bank, and JP Morgan, which is set to launch a digital bank in the UK this year, have been rumoured buyers. Starling’s Board is also currently understood to be in talks with US asset manager Fidelity about a £100 million investment, as part of a larger fundraise, which would keep Boden’s bank independent for now. But Starling’s days as a privately owned business appear to be numbered.

Starling’s early pursuit of small business banking proved to be a canny move. Picking-up a £100 million grant in early 2019 from the Banking Competition Remedies (BCR), to increase competition in business banking, was the seminal moment for the bank. But the process has been controversial, with reports of intense lobbying and banking executives frustrated at the lack of transparency around the grants. Starling was also slow to ramp-up its business lending over 2019.

COVID-19 changed that. It allowed Starling to dramatically grow its business lending via the Bounce Back Loan Scheme, which is fully underwritten by the government. And while other banks slowed down new account openings, Starling has kept the gates open. Looking ahead, it’s unlikely we’ll see radical new products like cryptocurrency wallets, but more personal and business lending is certainly on the cards. This will help Starling build its balance sheet and increase profits.

Boden has talked about building Starling into a global brand, but COVID-19 has slowed these plans. With one eye on an IPO, and the other on an acquisition, it seems unlikely that Starling will risk a large-scale assault on European banking. Dipping its toe into a small market like Ireland could still be on the cards.

A lesser known part of Starling’s business is its banking as a service proposition. This essentially involves licensing its technology to other firms, and tends to be very profitable. It also helps to diversify revenue, but banking as a service is an increasingly competitive field, and firms like Solarisbank and ClearBank appear to marching ahead faster.

When Starling launched it felt like a mature bank that just so happened to live in a mobile app. This helped it to win over high value digital-savvy customers from its bigger rivals. These customers are coveted as they are cheaper to serve and also require a range of financial products, making them more profitable, and this also makes Starling a target of strategic value for firms like Fidelity. But our large banks haven’t stood still. The NatWest banking app is well liked, and even a clumsy giant like HSBC has cobbled together a functional offering. With even more new banks on the horizon, all will be aiming to deliver better digital experiences. Starling will need something special to remain at the top of the banking table over the coming year.

Compared to challenger banks like Monzo or Revolut, Starling is a bit more elegant, a bit more corporate, and a bit more boring. Steered by Boden, who’s described as both brilliant and relentless, execution has been good. By acting like a high street bank, Starling has built trust among consumers and also garnered favour with the Establishment. If it avoids a major scandal and stays alert to emerging risks, it’s well placed for another bumper year.