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Starling Bank becomes first profitable challenger bank

Starling Bank has become the first European retail digital challenger bank to turn a profit while competitors mount losses. Maddy Christopher looks at its recent figures and next moves for the British fintech heavyweight.

9th Dec 2020
Staff Writer AccountingWEB
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Anne Boden - Starling Bank
Starling Bank

Starling Bank recently announced that it has become the first of the new breed of digital banks to break even and turn a profit. In October, it generated a positive operating profit of £0.8m, which represents £10.1m on an annualised basis.

“We hit break even in October and fully expect to be monthly profitable from here onwards on an operating profit basis,” commented Starling Bank CEO and founder Anne Boden. Starling expects to be profitable on a monthly basis going forward as it continues to grow and scale across Europe. 

“We have been planning for this most of the year and we knew we were going to do it by the end of the year. There was a bit of a hiccup when the coronavirus hit when for a few months we didn’t know how it was going to impact us.” Boden also revealed that the fintech became profitable earlier than expected.

In the past, Starling has been criticised alongside older competitors Monzo and Revolut by investors and the Bank of England for failing to turn a profit. BoE stated that new banks had “underestimated the development required” to become successful.

Following the announcement, Boden was named chief executive of the year at the Digital Masters Awards by by some of Europe's leading venture capital firms. 

“I’m equally certain that we will become a formidable competitor in the European banking market as we gear up to scale across Europe,” said Boden. “We know that our technology is hugely scalable because our tech team runs a constant simulation at around ten times our current capacity. We’re prepared for a sudden influx of customers and transactions. In fact, we’re prepared for pretty much anything.”

Starling Bank's trading figures

Key metrics October 2019 Last trading update

(July 2020)

October 2020
Number of Accounts - Retail 827k 1.25m 1.42m
Number of Accounts - Business 74k 200k 256k
Number of Accounts - Other Currency (EUR and USD) 39k 90k 100k
Average Deposits - Business £11,250 £15,250 £14,900
Average Deposits - Sole Trader £1,700 £2,850 £3,100
Average Deposit - Retail £900 £1,500 £1,625
Deposits £897m £3.1bn £4.0bn
Gross Lending £37m £1.0bn £1.5bn
Annualised Run Rate Revenue £26m £80m £108m
Operating Costs (annualised) £74m £85m £98m
Operating Profit (annualised) (£48m) (£4m) £10m
Starling’s total operating income was £9m in October, meaning an annualised revenue run rate of c.£108m – split into £5.5m net interest income and £3.5m gross fees and commissions income. The figures are over four times those of last years and a c.30% increase from the last trading update (three months ago).
Operating Income October 2019 October 2020 Annualised (October 2020)
Interest Income £1.0m £5.5m £65.7m
Interest Expense (£0.1m) £0.0m £0.0m
Net Interest Income £0.9m £5.5m £65.7m
Fees and Commissions Income £1.3m £3.5m £41.9m
Total Operating Income £2.2m £9.0m £107.7m

What has caused the growth and profit?

According to Starling Bank in its recent trading update:

“Interest income continues to be supported by strong growth in lending volumes, particularly the extension of government-backed lending schemes. 

“Interchange income continues to perform well, having increased over 20% between July and October 2020, despite the increased Covid-19 restrictions put in place around the country in recent months. This is the result of strong primary account growth, as well as increased customer engagement and card spend. The vast majority of our transactions continue to occur domestically with international spend declining after a strong recovery over the summer months.

“Starling continues to launch new products to the market, including chargeable subscription features such as the SME Toolkit and Kite card. While there has been strong uptake of these products, they are still a small contribution to operating income relative to interest income and present further upside to revenues and profitability in the future.”

Operating expenses

Starling’s October operating costs were £8.1m, with a 30% increase during 2020 and customer accounts have almost doubled. Fixed costs increased by c.15% in the past year and revenue has increased >400%.

  October 2019 October 2020 Annualised (October 2020)
Operating Expenses £(6.2)m £(8.1m) £(97.6m)

Customer accounts, and current account Switch Service and Which?

SME accounts increased >3x in 2020 to more than 100,000 multi-currency accounts and over 1.7 million accounts, including 1.42m retail accounts and over 256,000 SME accounts.

Starling is currently winning the most customers via CASS. In Q2 2020, Starling recorded the highest net switching gains of any bank in the UK with nearly 12,000 customers switching to Starling on a net basis. It has also topped the Which? reviews.

Customer Deposits

  October 2019 October 2020
Total Deposits £897m £3,957m

Lending

  Value (£)
BBLS £1,021m
CBILS £358m
Government-backed lending £1.4bn

Not for sale

Since Starling’s success, it has been attracting more interest from big banks such as Lloyds Bank and JP Morgan, although Starling has been eyed by traditional banks in the past. However Boden firmly responded that Starling’s ambition lay higher than selling. 

“Big banks taking an interest in Starling is not new and I have always said I didn’t do this to sell out to a big bank and nothing has changed,” said Boden.

With zero furloughed staff and 150 hires since the first lockdown, software development has continued during the pandemic. “We are constantly adding new features. It is not just about gimmicks, but doing useful things for customers with engineers releasing software all the time.”

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By thomas34
10th Dec 2020 12:21

Interesting article (up to a point) but the figures quoted appear to be demonstrative of an expanding business but of little help as regards its long term viability. Deposits are £4Bn (creditor) and lending £1.5Bn (debtor). We've no further details of the balance sheet.

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By jan kool
10th Dec 2020 17:40

Expanding business due to government-backed loans.

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