Building a Diversified, Profitable Digital Bank with Starling
Today, regular contributor Lex Sokolin and I are joined by Anne Boden, Founder and CEO of Starling Bank, one of the original wave of app-only digital banks in the UK.
Starling has built a diversified bank and achieved profitability for the first time in October, a rarity for digital banks.
Originally a retail-only offering, Starling has built out business banking and banking-as-a-service offerings and now serves a wide varied of customers.
In this conversation, Anne, Lex and I discuss Starling’s path to profitability, lessons for other digital banks, marketing and customer acquisition, and Anne’s new book on Starling’s first 7 years.
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Thank you very much for joining us today. Please welcome, Anne Boden.
Full transcript:
Will Beeson:
Anne Boden, and Lex Sokolin, welcome to Rebank.
Anne Boden:
Hi.
Lex Sokolin:
Good to be here.
Will Beeson:
It is great to connect with both of you, and Anne, the timing feels perfect for a deep dive, much overdue, I would say, deep dive on Starling. I guess we connected with you guys maybe a few years ago now, earlier on in your journey, but you guys have hit some very important milestones recently. Despite all of the market disruption that we've seen with COVID, you put out a press release I think, maybe along with some quarterly results very recently, saying that in October of 2020, so just last month, Starling broke even for the first time and expected to continue to break even going forward. Maybe that's the best place to start. You're years into this journey now. We're hopefully still early on in the digital transformation of all things financial services, but yeah, this does feel like an important milestone for digital banking. Why don't you tell us a bit about it?
Anne Boden:
Yeah. This is very, very exciting. We're now just over 1.8 million accounts, we have 4 billion pounds worth of deposits, one and a half billion of lending, and we broke even in October. So for the first time ever our revenue exceeded our costs, and this means that from now on we don't necessarily need to raise capital to support our operating costs. We're just raising capital from now on to support our lending and our capital needs from a bank equity point of view. So, that's the exciting time we're at at the moment. We're in the middle of a very, very difficult time for the economy. We are currently in lockdown in London, but digital businesses are doing so well. We have seen a shift from traditional businesses, face-to-face businesses, the retail high street, branches to digital very, very quickly. And we have been part of that trend, and we've been really doing well to support our customers in this difficult time.
Will Beeson:
Excellent. So look, I'm sure that the vast majority of our listeners are very familiar with Starling, but maybe a helpful way to allow you to provide a bit of background, but also keep it very topical, would be to ask you a little bit about how you feel now, we're X number of years on since I think you first hatched the idea of building a digital bank. How do you feel about the progress you've made so far versus what you set out to do?
Anne Boden:
Well, we're ahead of schedule, we expected to get to where we are today in a couple of years time. So things are going very fast, but to set the context, I'm a computer scientist. I started in banking in the 80s. I worked all over the world for all the big banks on technology and digital projects. To be honest, I was a Chief Operating Officer post-crisis in Allied Irish Banks, and I came to the conclusion that it was easier to start a new bank than fixing an old one. So I quit my job to start Starling in 2014.
Anne Boden:
And 2014 was the start of pitching to investors a new idea, a bank with a new technology base, with everything latest that Silicon Valley could offer, a new business model, and a different way of engaging with customers. And we would build this bank from scratch, with new technology and engineers. We started that journey in 2014, we launched into the app stores in 2017 after having a banking license in 2016. So we're a fully licensed bank regulated by the PRA and the FCA in the UK. And we are seven years into that journey now, and things are going really, really well.
Lex Sokolin:
It's always amazing to be ahead of schedule. And I'm really interested in opening up that point. You mentioned that your £4 billion in deposits, which I think the delta from this year is higher than all of the, sort of the deposit base that you accrued before. What would you point to as the cause of that acceleration? Is it simply COVID and people can't touch cash and therefore they have to touch a phone? Or is it something else in how you've been executing your strategy?
Anne Boden:
Yeah, there's a couple of things all happening together, and these trends have been the trends we've been seeing over the last three to four years. The longer customers use us, the more they use us. So as they experience Starling and get used to using Starling, they put more and more of their business through Starling, which means that they have higher balances and make more payments. And those average balances are very high. The more mature we are and the older Starling becomes, we attract a more affluent and more a stable customer base, and the cohorts that join us now are much more affluent than the cohorts that were joining us a year ago. This means that when you take those two impacts together, together with the fact that more and more of our customers are small businesses, we have 250,000 small businesses, and those businesses have very high balances.
Anne Boden:
This all means that the trends are going towards ever increasing customer balances. We have something like four or five times the average balance of one of our closest competitors. So in the neobank space, we are really leading the field, with the average balances four or five times their average balances. And when we compete against the traditional banks, we have equal or higher balances as them. So this is when all of a sudden those things happen together. The cohorts are getting more affluent and getting older, a typical customer is 37 years of age and getting older, and the longer our customers are with us, they actually use us more, and you take all these things together, that is why our balances are so high.
Will Beeson:
We're in, as we mentioned at the outset, the middle of a now extended pandemic. I think you mentioned that London is currently in the middle of their second lockdown, and that has had some pronounced impacts on consumer Fintechs that survived on interchange and FX, as travel and international spending has fallen. I guess just to provide a bit more color there for the audience, if you're a UK or European digital bank, you're operating in a tightly capped interchange environment. So your ability to generate revenue via card spend alone in your local markets is relatively small. So, when people travel abroad to South America or the U.S. or other uncapped interchange markets, you're able to generate higher revenues plus any sort of FX revenue that you can generate on top of that.
Will Beeson:
So there's been an impact on the consumer side. And it would be really interesting to hear perhaps given your perspective now, right, you effectively operate a consumer business and a business banking business, right next to each other. And while COVID has been detrimental perhaps to the consumer side of the business, at least for many Fintechs, it's been something of an accelerator for Starling on the business side, because it's allowed you to access or participate in government lending programs to small businesses, which has helped you grow a balance sheet perhaps faster than you otherwise would have, and therefore generate interest income, which I think has been a significant contributor to your revenue in October. I wonder if you could just talk that through a little bit, the difference between what you've seen on the consumer side and the business side.
Anne Boden:
Well, first of all, let's talk about interchange. 85% of our transactions are actually domestic transactions. So Starling has never been that dependent on international interchange. So, when people sort of stopped traveling it really impacted the Monzos and the Revoluts, though it didn't really impact us. So we are less dependent on the international business. Additionally, the interchange was impacted in different ways at different companies. For example, people stopped spending sort of couple of pound coffees in the City, so that very, very small payments that people are making for their lunches largely disappeared, but those transactions, which were the weekly shop or the big Amazon delivery continued throughout the lockdown. And because our customers tend to be families, tend to be people that are spending at the big grocers, that interchange was not that impacted. So, when the lockdown happened in March, there was a small sort of reduction in interchange, but that recovered and interchanges continue to grow.
Anne Boden:
So our business is quite a different customer profile to other neobanks. We have not been that hit by interchange during this crisis. But lots of businesses have been impacted during this crisis, in that they couldn't continue operating. And the government brought out a scheme to lend to those businesses. So, the scheme was called the Bound Back Loan Scheme and the Coronavirus Business Interruption Loa Scheme. Government backed lending to help small business. Now, these schemes work on the basis of the bank has to have the liquidity to lend. So the bank must do the lending itself and all the processes, the credit losses are guaranteed or limited in some shape or form.
Anne Boden:
So on the Coronavirus Business Interruption Loan Scheme, CBILS, the bank only has to take 20% of the loss. And on the Bounce Back Loan Scheme, it's 100% guaranteed. But the bank needs to be able to onboard the customers, check the customers, undergo all the various checks that need to be done on the customer and also fund those customers. This has been a big effort, so many of the non-bank lenders and peer-to-peer lenders didn't have the funding to do this, but because we're a bank and because we have balances, we were able to participate in this scheme so much so that we've actually been helping other lenders by providing funding for their processes.
Will Beeson:
Can you just talk us through the capital requirements for those two types of government guaranteed loans? So are you effectively only capitalizing the 20% risk that you're taking on the larger loans? And then 0% of the smaller loans? Or are the capital requirements more aligned with traditional balance sheet lending?
Anne Boden:
The capital requirements are not RWA driven, and the capital requirements relate to the operational risk elements of the lending.
Will Beeson:
Got it. So I feel like one of the reasons I was so excited about having this conversation is because we have over the past number of years, had all sorts of discussions with digital bank founders, Fintech founders, who maybe were maybe weren't in the business of offering debit cards and spending account like features. And one of the key points that we always kind of circled around was profitability as a digital bank, and all sorts of different views as to firstly how important that was, how fast.
Will Beeson:
Secondly, what the drivers of revenue generation and therefore profitability were likely to be at digital banks at scale. Thirdly, how important lending was going to be as part of the equation. And I guess on the flip side of that, how far you can get by just offering free banking at scale and do the economics at some point flip in your favor and you just get profitable once you hit five million, or 10 million or 50 million or whatever it is customers.
Will Beeson:
So, Anne, you guys at Starling, I would suggest from pretty early on have taken something of a diversified approach to revenue generation or to your business generally. We mentioned the consumer business, we mentioned the business banking. There's also an infrastructure business kind of banking-as-a-service or at the very least offering other Fintechs and financial services companies access to payment rails in the UK, and importantly, over the last maybe year or two, I think you've started to offer more and more subscription accounts, which has been another, I think, important driver of revenue. Can you just talk about that revenue mix a little bit, and I don't know, if you project forward over the next two or three years, what you see as kind of the main revenue contributors for Starling?
Anne Boden:
I think the first thing is, that I have a lot of background in lots of different financial institutions and the technology they use and the various business models. When I started Starling, I knew very well that it's imperative that we build the best infrastructure. And we also should do things that are difficult to do. If you do difficult projects, it does give you the differentiation. And it does act as a barrier to other people coming in. So we knew very well that we needed to build our technology from scratch. We don't do the banking package, we build it. We also have a business model that means it's all around providing services around the checking account or current account.
Anne Boden:
So, if you provide the customer with the very, very best technology and the very best service around their checking account, and you're on the top of all the league tables, and you can take all the league tables with all the consumer associations, such is Which? in the UK or the government's own surveys, we are right on the top of those lists, giving the very best app, the very best technology, the very best service. Then you can capture deposits at less than 10 basis points. And when you capture those deposits at 10 basis points, it gives you a huge strategic advantage in your lending because you don't have to drive your loan to deposit ratio up too high. You don't have to take too much risk.
Anne Boden:
So that is a sort of philosophy that we've always had in the organization. Yes, we are very into understanding where the revenue pools are. Because I believe that the revenue pools available to banks are going to shrink and there's going to be a huge pressure on cost bases so that the organizations can stay profitable. We compete with the Barclays and the Lloyds and the big banks, that's our competition now, it's not the neobanks. And whilst they'll copy everything we do in two to three years. The big battle is over cost base, in that they sit on billions of costs and we set on very, very limited cost. And that gives us a huge advantage, but getting on to what we do for revenue, we have interchange, we have lending, we provide banking as a service propositions to other Fintechs and other organizations and we have a limited number of subscription services.
Anne Boden:
We don't believe in giving away metal cards or gimmicks. All our subscriptions are things that we think customers benefit. For example, we have a child card you can have on your account. And that has proved very, very popular. We order three months worth of stock and we got through that stock in three days. So, these sorts of services where you're actually addressing a real need rather than giving out sort of airport lounge access is what we are known for.
Will Beeson:
Yeah. So, I totally agree with you there on the infrastructure piece. I've been long impressed by your focus on building real institutional grade bank infrastructure, not only for yourselves, but also potentially as a new business line. And it'll be interesting to see how that evolves over time and how much of a kind of a core business component it ends up being, i.e. the sponsoring or facilitating third-party access to infrastructure. But from my standpoint, it's always been, one it's very, very tangible asset value. And it's optionality in a sense that you guys had built for yourselves early on, both to support potential hyper-growth on the consumer banking or the business banking side.
Will Beeson:
And then, similarly, who knows, if this fast moving world in which we live had moved in a different direction, then, I think you would have been very well positioned to serve as something of an infrastructure provider. If you think back, to, I don't want to say the very earliest days of Starling, but I don't know, perhaps the time you were applying for your banking license, what were your expectations about what Starling would look like from a business line standpoint and from a revenue mix standpoint now. And how true have those expectations played out?
Anne Boden:
I recently published a book called Banking On It by Penguin. And that tells the story of me starting off by being at AIB and really digging deep into the financials of the organization and coming to the conclusion there was nothing else but to start a new bank if I was going to make a real impact on the industry. And that book talks about how I came up with the plans and how I talked to the regulators, how I created a management team and lost a management team. And up in The Bahamas, meet somebody who gives my seed capital of £48 million and then started the hard work on building Starling.
Anne Boden:
And over the last couple of weeks, I'd been talking about the book to people and they have been asking me, "What does it look like? How different is what you have now to what you set out to create?" And the very first presentations that I was sort of pitching around the City were very, very similar. It had a marketplace, it had an app that gave customers the analytics. It had a business model, which is very, very similar. What changed was, we were never expecting such an affluent, an older customer base as we have now. And of course, people have grown up, I was preparing these presentations seven years ago.
Anne Boden:
At the time we were talking about sort of, you're going to have an iPhone and you're going to have an Android, what are we going to do about a Windows phone? What are we going to do about a Blackberry? So the world has changed in that short period of time. The devices we're used to have standardized, the people's familiarity with using these tools has changed. What we didn't expect was to have the demographic we have now. We have a very valuable demographic, and people ask me, "Well, was that by design? Did you paint this picture of Starling being a bank for customers that would be profitable? How come that you have the profitable customers and the not so profitable customers have gone to some other bank?" It's difficult to actually figure out whether that was intentional. Did we design the brand to be attracted to these customers?
Anne Boden:
It is to do with the brand. We've always been a bank. We have never been a prepaid card. We have a slightly more trustworthy, slightly more serious persona as a brand, and that resonates with a certain demographic. And we're very fortunate to have profitable customers, customers who trust us and the customers who demand services for a much more sophisticated offering. So yeah, all these things that come together, I think that that was a surprise. But if I've gone to investors in 2014 and said, I am going to build a digital bank for people of this demographic, people wouldn't have believed me, but that's what we have at the moment.
Will Beeson:
Let me ask you one more question on something that you touched there briefly, and then I can hand it over to Lex a little bit. So the marketplace, which you just mentioned, I recall that being a core part of the value prop, a core part of the strategy over certainly the early years and even as recently as like a couple of years ago. I was surprised, and Lex and I touched on this, we just kind of did a run through of your annual results alongside Monzo's and Revolut's a few months ago now. But I was surprised to see that there wasn't more of a revenue contributor to Starling given how much emphasis it seems like had been placed on that. I wonder if you want to talk at all about what your experience with the marketplace has been and what your expectations for the marketplace as a component of the business are going forward.
Anne Boden:
Yes. Starling's had the most sophisticated and well-developed marketplace of all the new entities. We were very early to that and we have a very full marketplace. But to say it is a source of revenue is something different. And therefore I am very skeptical when competitors say that they're going to not lend, not charge anybody, but make money from a marketplace or make money from supporting utility switching. A marketplace for us is a place where we can effectively bring in new products and we can provide a more rounded offering for our customers, and also a place where our SME customers, our business customers could avail themselves and a whole suite of things to support them, their business. So a marketplace is an essential component of the offering, but I don't think it is a huge money spinner.
Will Beeson:
Lex, any burning questions.
Lex Sokolin:
Sure. Thinking about customer acquisition, what does, on the margin, that look like, and I guess, are the strategies to acquire a retail customer substantially different from the ones on the SME side?
Anne Boden:
Not really. We acquire up to about 4,000 new customers a day, probably a thousand of those are SMEs. Our acquisition strategy is very similar for both. And it doesn't cost us much more to acquire a business customer than a retail customer. We acquire these customers through digital, through brand awareness, through television advertising, a substantial amount of PR work. So our acquisition costs are very low compared to the rest of the industry.
Lex Sokolin:
And how does that effectiveness split between going through digital acquisition versus what you see as brand or PR?
Anne Boden:
So I think that you can do a huge amount of work on allocating cost to various channels. You will never really know how effective your big ads on television really are. It raises awareness, you don't know whether that ad led to a customer making a decision a couple of weeks later when they were searching online. It is quite difficult to do the attribution when you respect people's privacy. And I am very, very skeptical when people quote figures because there's no way you can really tell how effective your big ads are.
Lex Sokolin:
I'm really interested in this point about growth and customer acquisition, right? Because it's the dividing up of a market in a battlefield like you say, where you're competing with the global banks and you essentially have to outsmart them. And once you capture the customer, it's the kind of the cost engine where you have the advantage. But I think for many entrepreneurs, just the idea of capturing that customer on the margin is really difficult. When you talk about your bank as a service offering, do you include those in your overall user figures? Or is that separate? And I guess part of that is also like, what's a good profile for a banking as service partner for you?
Anne Boden:
We don't include any of our banking as a service metrics in our core number reporting. But acquiring a customer, we don't capture customers. We don't have to do that, at the moment we are very well known in the UK, and we are top of all the ratings tables, and more people switched to Starling in the last quarter than switched to Barclays. More people switched to Starling than switched to Lloyds, more people switch to Starling than switched to HSBC. We have taken real market share from the traditional players. And people are voting with their feet, and people are starting to use the service, telling their friends, using it more and more. We have better metrics than the traditional players, if you then consider the separate business of banking as a service, yes, we provide service to other Fintechs. We provide services to payroll providers, and so do the big banks.
Anne Boden:
And we offer better service at a cheaper price, and this themes through the whole thing of what Starling does. We provide a better service, we top all the rankings and we're cheaper. And that's what you need to really radically change an industry, you have to be better at a number of things. When I started Starling, it is very difficult to prove this. People would ask the question, I'd say, yeah, we do an X, Y, and Z. And that's why we'll build the business in this sort of way. But now the stats show how successful we are. When people ask us and say, "Well, why do people join Starling?" They're all sorts of different people for all sorts of different reasons. But they come into Starling and then they have made that decision that they want something new, and they want the service, and they want the fairest, the fairest system and they love it. And there's a huge emotional attachment to banking with Starling.
Lex Sokolin:
Fantastic. It's great to be both better and cheaper, but it's also great to have that emotional connection with your customers. One of the things that struck me about your positioning is being very forward with the kind of diversity, equity, and inclusiveness ideals that the world is now grappling with. Can you talk a little bit about kind of your work on the culture internally in order to make that be a reality, and whether you think that, that again creates a connection with your customers in any way and the demographics of who is banking with you and how?
Anne Boden:
Yeah, I think it's very important. We haven't had to manufacture a culture at Starling. You know, we stand for something, we're a very diverse organization. We really, really feel for customers when they're having a hard time. And I hope that we will never be a cold organization. We believe that the most important thing in your life is your health and then your family's health, but then it's your financial health. We feel for that, we feel for people that are going through difficult times and especially in this crisis. So, we believe that you can feel the culture, you can touch the culture at Starling. And the important thing is that people like working for an organization that they can identify with. And some of those things you cannot manufacture. You either are, or you're not an organization that has values and has a mission.
Will Beeson:
So, I would love to see if I can just loop back to one of the topics that we were kind of touching tangentially before, which is the lending business and the lending activities, that you guys do at Starling. There's been something I guess of a preference to avoid lending for a lot of consumer Fintechs, who I think have been pursuing something more akin to like almost Facebook, Google, we want to give services away for free. We want people to love them so much that we're just able to kind of magically manufacture revenue somewhere without doing the work of lending. But at the same time, if I think about myself, for instance, as a user of a lot of digital financial services, if I love the digital investments experience that they offer, if I love the digital banking experience that they offer well of course, if I want a car loan or if I want a mortgage, or if I want some sort of credit facility, I would much rather have that same philosophically aligned digital experience with that provider.
Will Beeson:
I wonder if in your experience talking to customers both on the consumer side and the business side, can you just talk a little bit about how important or not the fact that you lend and extend credit is to your customers and whether they view that as a huge value added service, or whether they view that as some sort of traditional bankers doing what traditional bankers do.
Anne Boden:
I think all customers want the ability to borrow money if they need to borrow money. So most customers want the ability to have an overdraft. I think most customers want to bank with a bank that can lend them money if they need it. The issue is that the majority of customers do not want those facilities. They want them to be there, but they don't want to use them. And that is quite an interesting fact about that group of people. If people are affluent, and spending, and have chosen Starling because they are financially literate, they probably don't want to borrow. And therefore you need to do your lending to another group of people.
Anne Boden:
And you shouldn't think of it as being providing the lending to the same people that are using your card. That is why we have diversification, that is why we have business lending, that is why we are growing into other sorts of lending. To think that you going to have a group of people that choose Starling because they are switched on and understand money, and then are going to need a substantial amount of unsecured lending the same month is just not going to work. And what we have is different pools of people that utilize the Starling machine in different ways. And that is how you get your profitability.
Will Beeson:
You mentioned before providing some capital to, I don't know, marketplace lenders, or other types of Fintech lenders. Is it more, I mean, are you doing consumer lending to different demographics? Or direct to SME lending to different demographics? Or are you providing wholesale funding to other lenders?
Anne Boden:
We originate both personal, unsecured personal lending, business lending through other platforms. We do our own lending to businesses and we have a range of other things, that we're looking at in the lending world. For example, we'll be doing business charge cards soon. So it is, you need to have sufficient range of lending products to optimize your capital. And also keep up with the growth of Starling. Starling is growing very, very fast. So we are constantly on the lookout for opportunities to fund and to build different funding businesses.
Will Beeson:
Got it, Lex, anything you want to wrap up with, and then I think we should give Anne a few minutes to talk through what's most important to her right now and looking forward.
Lex Sokolin:
Sounds good. Yeah. I always take the, right or wrong, the macro context and I'm really interested in the ambition in terms of geographically and in terms of the market share, right? Because at the pace that the bank is growing, it's soon going to have such industry market share that the UK as a market will potentially top out. And so the question is, what is the ambition in the UK and beyond. And then as you can either expand horizontally or you may end up bundling more types of things that businesses and individuals need, whether it is investing or whether it is retirement or whether it is insurance and sort of the bundling trends going on more broadly. So I'd love to hear kind of a view on the total addressable market. And then what type of prioritization you would have for growing beyond the current path.
Anne Boden:
Yes. Good questions. I think that Starling is always considers deep markets. We don't want to be niche. We want to grow in markets that are big. We have no intention of doing insurance and asset management products. We will always provide those to a marketplace in the UK. We have every intention of becoming one of the big five players in the UK in retail banking and across Europe, we're applying for a banking license in Ireland and we'll use that to passport into European countries. So we've got quite a lot on our plate. And it's very exciting.
Will Beeson:
All right. And so you mentioned the book and we talked about this important milestone of profitability. What else should people be aware of in terms of what you and Starling are focused on right now and looking forward?
Anne Boden:
Yes. This is very much a milestone for us. It is becoming profitable for the first time. Telling the Starling story, Banking On It is the story of Starling's last six or seven years, but we're at the start of a very, very interesting period. We no longer have to explain to people how we get customers and how customers are going to be profitable. And whether the business model works or not. The business model works, we are profitable. We have 1.8 million customers, we are growing very fast on a very profitable base. In order to be successful, you need both growth and profitability. And at the moment we have both, and therefore this is the point where we basically said that that business model works. So the next thing now is to do that across Europe.
Will Beeson:
Excellent. And look, congratulations on a wonderful first six or seven years at Starling and on this important milestone of profitability. And we look forward to watching your progress and continued success going foward.
Anne Boden:
Thank you very much. Really enjoyed talking to you.
Will Beeson:
Anne Boden, and Lex Sokolin, thank you very much for joining us today.
