Starling Bank bets on tech to boost growth as much-anticipated IPO looms
Starling Bank hopes to make technology “increasingly significant” to its business model as it ramps up international expansion ahead of an IPO, the chief of the group’s software-as-a-service (SaaS) division has told Morning Wire
The digital challenger bank’s more than four million UK customer accounts run on a software platform called Engine, which formally became a subsidiary of Starling in February 2022 with its own chief executive, Sam Everington.
Engine licences its platform to other banks, last month announcing inaugural deals with Salt Bank in Romania and AMP in Australia.
This approach lets Starling reap the benefits of foreign markets while bypassing the costly and time-consuming process of obtaining new banking licences and building a trustworthy brand of its own in each country, Everington said.
“The apps will often look and feel quite different because they’ll be tailored to the brand of the business and specific nuances of each country,” he added. “Romania will look quite different, but Australia will likely look quite similar to Starling’s offering.”
Everington explained that Engine started with banks in those two countries specifically as they have a “close regulatory alignment” with the UK.
He was coy about the exact value of the deals but said they were “significant commercial contracts” that would “run for a while”.
Engine’s business model relies on monthly subscription charges, meaning its revenue partly depends on the long-term success of its clients.
“That’s why we’ve taken our time in finding the right customers to start with,” Everington said.
“It’s a big financial commitment, but it takes a number of years to really pay back into a transformed business. And so we’re looking for an organisation that has ambitions to grow because most banks still treat technology investment as a cost-saving exercise.”
Some have asked whether Starling is trying to rebrand itself as a more tech-focused company, driven by Engine. An unnamed former senior employee told the Financial Times in July that Starling’s long-term strategy is mainly focused on the Engine business, rather than the bank itself.
“They’re equally important,” Everington clarified. “The bank is the main part of the business today, and it’s the technology that enables the bank to be effective. The difference with Engine is we can do that it in other markets where Starling isn’t licenced.
“In the near term, the bank is the large, successful, profitable entity. But we’ve set them up independently so they can have an equal and appropriate focus. We need that so banks contracting with Engine don’t feel like they’re a second-tier client.”
Whatever the group’s long-term strategy, Everington plans to ramp-up Engine’s operations as he continues to speak with “a number of” potential clients across the world.
“The team is growing every week. It’s probably three or four times bigger now than it was at the start of the year,” he said. “It will continue to grow – we’ve got big hiring plans for next year.”
Tough competition
Starling continues to fight for domestic market share with Revolut and Monzo, as well as subsidiaries of bigger lenders capitalising on demand for digital banking.
Revolut is keenly pursuing a UK banking licence to boost growth in its home country, while Monzo is reportedly close to a deal for up to £500m funding led by Alphabet in an agreement that could value the neobank at around $5bn (£3.9bn).
Daniel Pinto, president and chief operating officer of US giant JPMorgan Chase, expects the firm’s British digital bank, Chase UK, to break even in the next 12 to 18 months.
Meanwhile, Engine is facing increasing competition from other banks and fintechs similarly marketing their own software.
Cloud banking fintech Thought Machine has landed deals with big players such as Lloyds, JPMorgan and Morgan Stanley.
Other clients include Standard Chartered’s virtual Hong Kong bank Mox and Durham-based challenger Atom Bank, which last month raised a further £100m from shareholders – albeit with a valuation hit.
Everington is well aware of the competition. “Most of the big banks run traditional core system mainframes from a few large vendors that have been around a long time. But most are running systems from the 80s and 90s that have challenges delivering real-time banking services.
“The incumbent vendor has an inherent advantage. They are known to the organisation and can sell something that looks more like an upgrade project.”
He added: “There are some more fintech core systems that do well on some interesting platforms out there. But they’re not generally running at the scale of the big banks.
“Starling’s got four and a half million accounts on it, and our test environment has more than 20 million accounts in it, so we know we can really scale this thing.”
Ultimately, Everington sees Engine becoming an “increasingly significant part” of Starling as it gears up for a much-anticipated public listing that could make the group an even more serious threat to the biggest high street lenders.
“We’ve really done a lot of preparation for it,” he said. “An IPO is still the plan. It is in the future, but there’s no set timeline for it.”