Can Starling Bank make tech its business?

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Anne Boden’s shock departure as chief executive of Starling Bank has left what was once called “Bank Possible” facing one of the most critical decisions in its nine-year history. 

Not only does the bank have to find a replacement for Boden — Starling’s founder who left it “like the Catholic Church without the Pope”, according to one senior rival banker — but its strategic direction is up in the air. 

Starling may have finally hit profitability last year but its valuation has fallen from £2.5bn to about £1.5bn and investors are demanding proof it can bounce back ahead of a mooted initial public offering.

“We’re asking what do we need to do to IPO a business that’s worth £5-£7bn — and can we do something that makes it £10bn?” said one top 10 investor. “The challenge is what do to the business so when it IPOs people look at it differently [from traditional banks].

“We need to demonstrate this is a bank that’s capable of growing 20 per cent plus sustainably [and] sustain very high-profit levels,” said the investor.

The hope for some is that Starling can recreate itself as a highly valued tech-focused company, in part by licensing its own banking platform, Engine, to other financial groups.

“Their long-term strategy is the tech, not the bank,” said one former senior employee. “Starling Bank might become a spin off but the primary business model is to franchise out the tech stack.”

Starling’s chief financial officer Declan Ferguson told the Financial Times in June that the aim was to expand Engine outside the UK, noting it “is definitely a possibility” that Starling ends up looking more like a software company than a bank in the future.

“Demand [for Engine] has been huge — if you fast forward five or 10 years, you can see a situation where it’s generating best-in-class returns,” he said.

For now, though, Starling is having its growth prospects in digital banking threatened by deep-pocketed newcomers such as JPMorgan Chase trying to muscle into its retail markets. And, while investors can see a path to a higher valuation, it is far from clear that Starling can successfully transform.

“Doing enterprise sales of banking software is completely different to having 3.5mn consumers with a current account,” said one executive at another digital bank. “It’s very rare to find banks who have pulled that switch off.”

Boden, who still sits on the board, decided to step down after a row over fund manager Jupiter’s valuation-chopping sale of its holding, according to people familiar with the situation.

Starling has denied that Boden was forced out, and said she chose to step down as she felt her role as chief executive and major shareholder were incompatible.

But alongside that quarrel with investors, one former employee of Starling said there was also internal scepticism about whether Boden, who some consider a retail banker at heart, could oversee the switch to a tech-focused business. People close to Boden and Starling rejected that concern.

Starling hopes to license out its own banking technology platform to other companies, providing a white-labelled version for them to run more financial services such as processing payments, card transactions and opening customer accounts. Engine was officially carved out as a subsidiary with its own chief executive last February.

Critics argue that bolting another business on to Starling only hampers an already complicated bank.

“It’s kind of a collection of bits,” said a senior executive at another digital bank.

But backers say Starling can make the transition work, building on its existing reputation and allowing Engine to develop at arm’s length. They also note that Starling hit profitability in 2022 on the back of businesses such as current accounts, mortgages and government-backed loans.

Monzo — founded by Starling defectors but with a greater focus on personal lending — is only expected to report profitability in its annual report for 2023.

“Starling isn’t a lender with all of the revenue coming from one profit line, the brand is very well known,” said David Brear, chief executive of fintech consultancy 11:FS. “They’re playing at being a better bank, rather than fundamentally changing how financial services work.”

But, as yet, the bank has not outlined major deals with major players buying Engine around the world. Although a spokesperson said that “big deals are in the pipeline and there will be an announcement soon”, the section on the service in the latest annual report said simply it had made “great strides in the European and Australian markets” and told readers to “watch this space”.

“They’ve been very very busy flying around the world post-pandemic trying to hawk it,” said an executive at another digital bank. “It is been a big piece of work over the past 18 months, but it doesn’t seem to have particularly landed with something substantial.”

Another former senior employee also expressed scepticism because of growing competition from fintechs and banks also trying to push their software platforms to the market.

“Is this really where the bank should be going? It’s a crowded market,” they said. Among the other players are fintechs such as cloud banking platform Mambu and Thought Machine, which has racked up customers including Lloyds, Morgan Stanley and JPMorgan.

Boden, who remains a powerful figure for many in the bank and retains a seat on the board, will have a hand in choosing her successor — with people close to the decision-making process suggesting that interim chief executive John Mountain could keep the job permanently.

Whatever the outcome, the new boss of Starling will have to prove they can take the bank to the next level.

“Can you run a growing bank while growing a global offering on a software basis? It requires different management approaches,” said the digital bank executive. “That’s the question that the new Starling management is going to have to grapple with.”