Fintech Surge Turns Selective
Over a decade ago, Starling, Monzo and Revolut entered the banking scene to challenge traditional financial systems. These fintechs expanded rapidly by leveraging technology to improve operations and attract customers. Each firm ballooned its customer base in record time. However, only Monzo and Revolut maintained their growth trajectory as Starling began to falter.
Profits Diverge Across Fintech Trio
Revolut reported over £1bn in profits this year and now boasts more than 50 million customers. It surpassed HSBC, Europe’s largest lender, in key financial metrics. Meanwhile, Monzo prepares for a £6bn IPO on the London Stock Exchange. Starling, once seen as a rising competitor, reported a 25 per cent fall in profits. Its 2024 profits dropped to £223m from £301m the year before.
Figure 1: Starling’s profits dropped to £223m from £301m the year before
Operating Costs Rise Amid Modest Growth
Starling’s revenue rose by £32m to £714m but operating costs climbed sharply. Costs jumped from £332m to £403m over the year. The increased spend outweighed the modest revenue boost, further denting Starling’s bottom line.
Regulatory Penalty Hits Hard
A £29m fine from the Financial Conduct Authority added to Starling’s troubles. The FCA criticised the bank’s regulatory failures as “shockingly lax”. It said Starling’s controls did not match its growth pace. Starling opened over 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2022.
Covid Loan Scheme Failures
Starling also absorbed £28.2m in losses from pandemic-era loans. These loans were issued under the Bounce Back Loan Scheme, designed to support small businesses. Starling chose to waive the government guarantee after identifying eligibility issues. The bank admitted weak internal controls led to improper loan checks.
Admission of Internal Failures
Raman Bhatia, Starling’s chief executive, addressed the loan loss in a conference call. “In some cases, we think we may not have met all the procedures, all the requirements, of the scheme,” he said. The bank did not confirm if fraud or crime had occurred within the tranche of loans.
Historic Scrutiny Over Loan Conduct
Former minister Theodore Agnew previously accused Starling of using the scheme to grow its valuation. He claimed the bank failed to assess borrowers adequately. Starling founder Anne Boden had denied these allegations. The bank’s business customer base grew from 87,000 to 330,000 during the scheme. Starling issued £1.6bn in Bounce Back Loans by March 2021, up from just £23m in loans before the pandemic.
Leadership and Workforce Tensions
Leadership changes followed the turmoil. Anne Boden stepped down in 2023, citing a conflict of interest. Raman Bhatia took over in 2024. Staff tensions rose after he mandated 10 days in-office work monthly. Reports surfaced of a staff exodus due to limited office space. Staff costs rose to £304m as headcount expanded over the past year.
Customer Growth Slows Down
Customer momentum slowed significantly. Starling’s open accounts rose ten per cent to 4.6 million, down from 20 per cent growth the year prior. In contrast, Monzo’s customers surged 31 per cent to 9.7 million in 2024. Monzo also reported an 88 per cent rise in customer deposits, reaching £11.2bn.
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FCA and CFO Respond to Fallout
Declan Ferguson, Starling’s chief financial officer, commented on the FCA fine and loan losses. “We continue to make significant investment into our financial crime resource,” he said. “Working closely with both the FCA and the British Business Bank, we have also sought to limit the impact of these issues and ensure they remain one-offs,” he added.
Marketing Overhaul Amid Reputation Damage
Michele Rousseau joined as chief marketing officer during the crisis period. Her appointment came as Starling sought to manage its brand and reputation. The timing coincided with increased regulatory and operational pressure.
Engine Division Offers Hope
Starling may look to its Engine software unit for growth. Engine, a software-as-a-service subsidiary, posted £8.7m in group income. This marked a 284 per cent year-on-year increase. Starling now aims to expand Engine across the United States.
Expansion Strategy in the US
Chief executive Raman Bhatia said the US market offered significant potential. He targeted Engine revenues of £100m in the short to medium term. “The North American market offered a huge opportunity,” Bhatia stated.
Strategic Review and Future Uncertainty
John Cronin, founder of Seapoint Insights, highlighted Starling’s structural limitations. “Starling has no choice but to move up the risk curve,” he said. “Its limited scale and consequent lack of operating leverage, high risk weights and relatively higher deposit funding costs mean it just cannot compete with mainstream banks,” he added. Cronin questioned Starling’s competitive edge in the current market.
Fintech Status Under Threat
With profits down and regulatory scrutiny intensifying, Starling’s standing as a fintech leader faces serious challenge. If its new ventures do not succeed, the firm may risk losing more than just growth momentum.
