Anne Boden, CEO Letter July 2022

A Landmark Year

A category of one
This is a landmark year for Starling. We achieved our first full year of profitability, just five years after launching in app stores, and established a sustainable business model that will allow us to generate our own capital and to expand our business into new markets.

For the financial year ending 31 March 2022, we swung to a pre-tax profit of £32.1 million from a pre-tax loss of £31.3 million for the financial period ending 31 March 2021.

Revenue rose 93% to £188.1 million in 2022 from £97.6 million in 2021. Our deposit base grew by 55% to £9 billion.

Our previous financial year, to 31 March 2021, covered a 16 month period as we changed the timing of our financial reporting last year.

In the three months following the end of our financial year (31 March 2022), Starling has continued to grow at pace and in June 2022 reports an annualised revenue run rate of £331.2 million driven by year on year lending growth of 72% to £4 billion. We have now opened more than three million customer accounts, including more than 465,000 accounts for small businesses.

With our first full year of profitability, we’ve placed ourselves firmly in a category of one. As an innovative digital bank with a sustainable business model and a strong balance sheet we are generating our own capital and we stand apart from both the old banks and other challengers.

Supporting our customers
Last year we reported our results against the backdrop of the COVID-19 pandemic and successive lockdowns. The world looks very different now. As we continue to navigate the longer term impacts of the pandemic, new sources of uncertainty and instability have emerged, including the Russian invasion of Ukraine, which is having a devastating impact on the people and country of Ukraine. In addition, the cost of living crisis, which, with inflation reaching its highest level in the UK for 40 years in May, at 9.1%, is hitting some of the most vulnerable people in society. All this has been aggravated by a global supply chain crisis and labour shortages as the world starts to recover from the pandemic.

The full effects of these headwinds on consumers and business have yet to be seen and we are watching closely to see how the most vulnerable are being affected. We remain extremely well capitalised and our growth remains strong. While I’m proud of Starling’s success, I am also alive to the potential economic risks that may bring a prolonged economic downturn in the months ahead.

Since the end of our financial year, 31 March 2022, we’ve started to see the first signs of an impact on our customers’ behaviour, with rises in the amount being spent on energy bills and falls in discretionary spending on items such as entertainment subscription services. It’s too early to tell how much the cancelled subscriptions for home entertainment services reflect a tightening of belts and how much is due to the end of lockdown freeing people up to go out more. We’ll be monitoring trends closely so that we are best able to support our customers.

How to build a (profitable) bank
If 2020-21 was the year of lending to small businesses for Starling through government-backed COVID loan schemes, then 2021-22 was the year of mortgages. This has been a natural progression of the Starling story.

When I started Starling in 2014, some were surprised about how I decided to go about it. Normally banks are built from the asset base up, starting with decisions on what to lend, who to lend to and what strategy to deploy to find those assets. Starling has always been contrary; we look at banking differently and we set out with an altogether different approach.

Our proposition at the outset was to delight customers and build something for their daily financial health. By virtue of building a fantastic service for people day in and day out, we won their trust. With trust came deposits and, as a consequence, assets and a lending strategy.

We started with lending for personal account customers through our overdrafts. We subsequently launched our accounts for small and medium-sized enterprises (SMEs) in 2018 and set about building our SME lending platform. Then COVID-19 hit in 2020. Overnight, the big need was for lending to small businesses. We didn’t have any choice over the timing. Our customers needed this lending so we stepped up.

Our motivations in joining the government-backed Bounce Bank Loan (BBLS) and the Coronavirus Business Interruption Loan (CBILS) Schemes were to support our customers and to protect the tax-payer guarantee through implementing the schemes with precision, rigour and speed. The issue at the time was urgency. Our priority now is to support borrowers in paying back their loans and to get money back from fraudsters who abused the Schemes. As I noted at the time in a blog published at the start of the schemes in May 2020, “We do not, in two years’ time, want to look back on this period as one where we all abdicated all reason and left everybody out of pocket.”

This is why, at the time of lending, we put in additional BBLS checks, for example, by asking for more detail from sole traders’ tax returns, and explaining that “unless you, as a small business owner, properly understand your financial position, you cannot, with your hand on your heart, make the declarations about your income that the government requires you to make on the BBLS forms.” In addition, we implemented the system for checking duplicate loans within days of its introduction.

Crucially, we remained open for new accounts in 2020 during the pandemic, unlike many High Street banks. Most new customers just wanted a new bank, one that was open and there for them 24/7. Only a minority, some 14%, of SME customers who joined us during the period we were open for BBLS lending, received a loan; 86% did not.

Diversifying our asset base
In 2021 we focused on diversifying our asset base into new asset classes in order to bolster our resilience and bring in new revenue. This included the acquisition in July 2021 of Fleet Mortgages, a specialist buy-to-let mortgage lender.

Starling continues to build on the mortgage capability it gained through Fleet, with more than £2 billion of mortgages now on the balance sheet as at June 2022. This growth in lending has been funded by our growing deposit base, which increased by a further £600 million in the three months to the end of June 2022.

This type of lending now accounts for the majority of our loan book and in the current financial year the government-backed BBLS and CBILS schemes represent around 44%. This proportion will shrink further as we continue to diversify our lending portfolio.

Our strategy is to retain a low loan to deposit ratio, and to do more organic lending to our own customer base.

I’ve made no secret of our M&A ambitions and you can expect targeted acquisitions in the lending space to play a key role in the year ahead, but only at the right price and in the right market conditions.

So this has been the Starling strategy to date. Step one: put the customer first by offering delightful, useful and relevant services. Step two: build up a balance sheet over the years and lend.

Buy Now Pray Later
I’m often asked if we’re planning to move into the Buy Now Pay Later lending space. The answer is easy. No. We look at lending differently at Starling. BNPL lenders, just like many crypto currency players, have been engaging in regulatory arbitrage and exploiting the fact that this type of activity is still largely unregulated.

This kind of lending is likely to be among the first to be hit in a downturn, as we are now seeing. I don’t doubt that there is a clear need for new types of lending, but there’s nothing clever about lending without regulation. Meanwhile, as the regulators continue to search for the right words to say on BNPL, the market has already spoken. Valuations in the sector have plummeted and some of the biggest players are cutting jobs.

The end of Fintech froth
And what are the markets telling us? It now seems that we’re nearing the end of Fintech froth. For many, the “grow customer numbers and boost the valuation without figuring out how to be profitable” approach is now looking less robust.

Starling has never bought into the popular myth that having no revenue makes you more valuable. And we’ve never pursued a growth at all costs strategy. We look at things differently and our approach has always been to focus on building profits and developing a sustainable business model.

Fintech has prospered by using technology to transform the customer experience of financial products that were low priority for incumbent banks. Yes, the big banks for many years did not invest in consumer products confident that there were no better alternatives. Fintech changed all that and now the old banks are faced with catching up fast and spending in some cases billions to compete.

Engine of growth
This is why we embarked on a new phase of growth in 2022 with the launch of Engine by Starling, our Software as a Service (SaaS) subsidiary. A cloud-native, full-featured, and flexible banking platform, Engine will take Starling’s software to banks around the globe.

Our aspiration is that when people look at Starling in the future, they will see an international tech company that also owns a successful banking business.

We’ve never been afraid to be in the engine room of change and we are confident that we are really good at building technology. It’s not so much about glamour. Rather it’s about providing services that are relevant and resilient.

This brings me to our withdrawal this week of our application for a banking licence in the Republic of Ireland. This was a tough call to make, particularly as we had Ireland in our sights for so long. We decided that market conditions and our own expansion plans meant that securing an Irish banking licence was no longer a top priority. Sometimes changing course is the right option. My job as CEO is to constantly test our thinking against evolving circumstances and to make sure that we are delivering value and maximising potential for growth.

Driving high growth enterprises
Growth is essential if we’re to continue creating more good jobs and boosting the wider UK economy. As chair of a new government-backed Taskforce on women-led high-growth enterprises, I’m passionate about breaking down the barriers that hinder women entrepreneurs.

Society is not particularly tolerant of women entrepreneurs, offering little or no support framework. Encouraging more women into scalable businesses, particularly in science, technology, engineering and mathematics, is one solution. So is boosting investment in women-led firms and encouraging more women venture capitalists. But we need to go much deeper than that.

Research from INSEAD suggests that women-owned startups that do get backing from women VCs are much less likely to secure additional funding compared to startups backed by investors who are men. The researchers speculated that the women entrepreneurs receiving support from a woman investor, “were perceived by observers as less competent, and consequently the business idea as less promising.” There’s so much to unravel there.

Together with the Taskforce members, I want to help change such attitudes and find practical solutions to the wider challenges holding back women entrepreneurs.

Outrunning the bear
In the meantime, Starling continues to grow at pace. With our current accounts for individuals and small businesses, we continue to delight our customers with innovations and to grow our current account base, addressing the deep market opportunity offered by the UK banking market.

A recent analyst report from one of the big research houses concluded that neobanks in the UK, while leading on customer experience, were not making much of an impact because the big banks still hold a 60%+ share of primary customers in the market for current accounts. I look at our challenges very differently.

We launched our accounts for SMEs in 2018. With an eight per cent share of the UK’s SME banking market, we’re already at half the SME share of Barclays (founded in 1690) and well ahead of our 2023 target of 6.7 per cent. For personal accounts, we have an estimated market share of 3 to 3.8 per cent (depending on how you measure the current account market). That’s roughly one sixth of the market share of RBS NatWest (founded in 1724). So analysts please note, we’re not aiming to capture 60 per cent of the entire sector, we’re setting out to beat individual banks. As they say, you don’t win by outrunning the bear, you win by outrunning the other people it’s chasing.

Climate change
In 2021, we completed our first carbon emissions audit and committed to a one third reduction target in our carbon emissions by 2030 and to offset carbon emissions from our own operations and supply chain annually from 2021. We completed our 2021 offsetting programme in early 2022, supporting work on forest creation and protection, solar power, peatland restoration and energy efficient cookstoves.

Like it or not, we’re still, as a society, firmly anchored in traditional sources of energy. Fossil fuels remain important and millions of workers depend on the carbon economy for their living. The challenge now is to make a just transition away from oil and gas in a managed way that works for everyone and does not leave entire communities behind. Renewable energy technology is a global public good that should be available to all, not just the well-off. At Starling, in the coming year, as we contemplate this we will explore the possibility of more innovative approaches to carbon reduction.

Fighting fraud
In January, I revealed that we had withdrawn paid advertising from Meta because of its failure to prevent fraudsters from advertising on its Facebook and Instagram platforms. Interestingly, because we sought alternatives to mitigate any potential impact, our strong growth continued. So it’s unlikely that we’ll be rushing back to Meta even if they do manage to put their house in order.

Financial fraud is not just an industry-wide problem for all banks; it’s a societal problem that requires a solution from everyone involved, including, but not limited to, governments, law enforcement, regulators, social media platforms, telephone companies and more.

We know that to best protect our customers from scams, we need to be constantly adapting to the latest trends. Optimising our technology is essential in this fight and we’ve invested heavily in using it to provide real time payment screening and account monitoring across all of our activities.

Coming home
As I write this letter Starling’s London staff are busy packing up boxes and getting ready to move into our new HQ, the Fruit and Wool Exchange in Spitalfields. Like many things, our moving plans were delayed by two years by the pandemic. Our new London home is steeped in history; it served as a fruit exchange from 1929 to 1991 and was redeveloped a decade ago. Its combination of new and old seems fitting for Starling and a good complement to our offices in Southampton (historic) and Cardiff (modern).

It’s a far cry from our early days moving from building to building. In the very early days, my ‘office’ was a coffee shop in central London where I would sit with a laptop, drinking endless cups of tea while I wrote email after email to get my big idea off the ground. Starling later moved to several other offices, including one where the only way to exit the building was via a fire escape and the last person to leave every day had to jump over a fence.

Also in train right now is Starling’s sponsorship of the Women’s Euro 2022 football championships, taking place in nine English cities throughout the month of July. It is a delight to see the women’s game becoming so popular again. More than a century ago, in December 1921, the Football Association (FA) banned women from playing on FA-affiliated pitches. They deemed football to be “quite unsuitable for women.” (Where have I heard that before?) It wasn’t until 1969 that the ban was lifted. At a time when women’s rights are being eroded elsewhere, it’s good to see the championships garner so much positive attention. It is billed as the biggest women’s sporting event in European history, with half a million tickets sold.

Thank you
As ever, our colleagues proved to be our greatest asset as we completed our first full profitable year. I am grateful for their hard work, resilience, motivation, ingenuity and good humour. Thanks to them, and to the critical input and engagement of our customers, investors and Board, we face the year ahead confident of further growth.

And finally, a special thanks to Tony Ellingham who retires this month as Starling’s Chief Financial Officer. Tony joined Starling back in early 2015. From Day 1, he saw the potential of Starling, encouraged my vision, and has been there for me with his calculator every day since. Starling could not have come this far without him.


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