Executive Summary:
Starling Bank is an online bank that provides private consumers as well as business owners with a variety of financial products.
Starling Bank makes money via subscriptions, interchange fees, interest and overdraft fees, transfer fees, referral fees, licensing fees from its API, interest earned on cash, as well as a variety of additional services.
Founded in 2014, Starling Bank has risen to become one of the U.K.’s leading challenger banks. It now boasts over two million accounts.
What Is Starling Bank?
Starling Bank is a FinTech company that offers a variety of financial products to both consumers as well as businesses.
Starling works just like a regular bank. Consumers can register for a free current account, which offers a diverse set of features, including saving goals, split bills, or free ATM withdrawals.
Users can, furthermore, create separate accounts for their life partners (joint accounts) or even children (named Kite).
Conversely, if you own a company, you can also create a business bank account, which provides you with accounting and bookkeeping features, business spending insights, mobile cheque deposits, and plenty of other advantages.
Both the personal as well as business accounts come with a free Mastercard debit card, which allows customers to withdraw cash or pay for goods and services.
Apart from its banking products, users can also apply for either personal or business loans via overdraft or by actually borrowing money from Starling.
All of the accounts that Starling offers are protected up to £85,000 by the Financial Services Compensation Scheme (FSCS). Users can access the bank’s 24/7 customer service should any issues arise.
As a neobank, Starling is primarily accessed via its mobile apps (available on either Android or iOS devices). Alternatively, users can also log into their accounts via the bank’s website.
How Starling Bank Started: Company History
Starling Bank, headquartered in London, United Kingdom, was founded in 2014 by Anne Boden, a banking executive with over 30 years of industry experience.
Boden, a native of South Wales who grew up in a modest household, graduated from Swansea University with a degree in computer science and chemistry in 1981.
Her banking career almost started almost accidentally. When she graduated, Boden actually wanted to get into defense or intelligence but her mother convinced her to at least go for one banking interview.
That one interview eventually got her into Lloyds Bank’s graduate training scheme where she ended up staying for three years. During the scheme, she helped with the creation of CHAPS, the UK’s first real-time payments system.
Over the next few decades, Boden held various senior roles at renowned banks, including Standard Chartered, UBS, or ABN AMRO.
In 2012, Boden moved to Ireland to become the chief operating officer of Allied Irish Banks (AIB). The bank was still suffering from the aftermath of the financial crisis and tasked Boden to modernize and completely revamp its infrastructure.
While her stint was somehow successful, it didn’t leave a positive mark on her. She saw first-hand how people, even years after the crisis, were still suffering financially. Many lost their jobs and, as a result, were not able to pay off mortgages or other financial obligations.
Boden decided to take another year off (she was on a one-year hiatus prior to starting at AIB) to travel the world. Being single and without children allowed her to visit a variety of organizations, such as Boeing Mutual, which offers financial services for workers in its aircraft factory in the United States.
She quickly came to the conclusion that she wanted to build a bank for the very same people that lost trust in the financial system. That was in early 2014.
To develop the bank that she envisioned, Boden recruited a variety of people with extensive experience in the financial industry. One of those recruits was Tom Blomfield whom she met at a dinner back in 2011.
At the time, Blomfield was one of the founders at GoCardless, a FinTech startup that allowed businesses to set up direct debit payments online. Boden even became an advisor to GoCardless.
Blomfield eventually left GoCardless in 2013 and joined a New-York-based dating startup. He eventually returned to the U.K. in 2014 to join Starling Bank as its co-founder and Chief Technology Officer (CTO).
Unfortunately, their relationship was marked by constant arguments and disagreements over how Starling Bank was supposed to be built. The tipping point arrived in January 2015 when Boden declined an investment after learning that the interested company’s co-founder had committed a serious crime.
As a result, Blomfield resigned a few days after. To make matters worse, he even staged a walkout and convinced other co-founders as well as software engineers to leave the company alongside him. Blomfield and the other employees went on to found Monzo, which became one of Starling’s fiercest competitors over the coming years.
Meanwhile, Boden all of the sudden found herself without co-founders and slowly running out of cash. First, she recruited another set of employees. After months of rejections, Bahamas-based investor Harald McPike invited her to his home to pitch the idea of Starling.
For three days straight, he fired various questions at her. At the end of the trip, Boden had secured a £48 million investment from McPike. However, this came at a serious cost for Boden. With the investment, McPike had acquired a majority stake (around 66 percent) of the company.
Nevertheless, the funding allowed Starling to meet the necessary capital requirements to secure a banking license, which it eventually did in June 2016. The banking license would allow the company to potentially offer a variety of financial services, such as issuing loans.
However, Starling’s initial strategy was to focus on one single product and provide a far superior experience compared to the incumbent banks. That product became its current account, which it launched into beta in March 2017.
The company, furthermore, announced that it would eventually launch a third-party marketplace. Other financial service providers, such as TransferWise, would be able to offer their products to Starling customers. The marketplace launched a few months later in September 2017.
Over the next coming years, Starling continued to add partners to its marketplace, raise more funding, and expand its product line. In March 2018, for instance, it launched business bank accounts for small and medium enterprises (SMEs).
A year later, in February 2019, Starling became the center of public backlash after securing a £100 million grant from the Banking Competition Remedies board. One of the board’s members, Aidene Walsh, had worked for Boden several times over the past 15 years and was even an advisor to Starling itself.
As opposed to Monzo and Revolut, which poured millions upon millions into advertising, Starling decided to mostly stay in the background. For instance, Starling launched its first TV advert only in October 2019.
However, its resourceful spending allowed Starling to weather the coronavirus crisis significantly better. While Monzo and Revolut had to lay off a significant number of its employees, Starling did not furlough any of its staff.
By the end of 2020, Starling Bank became the first profitable challenger bank in the United Kingdom. It broke even for the first time in October 2020.
With continued funding injections and profitability well into 2021, Starling was furthermore able to make its first-ever acquisition. In July 2021, it bought U.S.-based Fleet Mortgages for around $69 million.
Today, Starling Bank boasts well over two million current accounts while holding customer deposits of close to £6 billion. Furthermore, more than 1,000 people are now employed by the company.
How Does Starling Bank Make Money?
Starling Bank makes money via subscriptions, interchange fees, interest and overdraft fees, transfer fees, referral fees, licensing fees from its API, interest earned on cash, as well as a variety of additional services.
Starling’s business model has always been built on serving both individual consumers as well as a variety of different businesses.
To that extent, it has not only launched multiple business bank accounts but also implemented a marketplace that provides additional business tools as well as an API that companies can use for their own applications.
Let’s take a closer look at each of the firm’s revenue streams in the section below.
Subscriptions
Starling Bank charges a variety of monthly subscription fees for the different accounts that it offers to both consumers as well as business owners.
The personal current, as well as business current and sole trader accounts, don’t have a fee associated with them.
On the other hand, users pay a fee whenever they open a second current account (£2 per month), a Kite account (£2/month), or a USD business account (£5/month).
Furthermore, Starling charges a monthly subscription to its business toolkit, which provides company owners with accounting and bookkeeping features.
Interchange Fees
Whenever a customer uses their Starling-branded debit card to make a payment, a so-called interchange fee is being applied.
The interchange fee is being paid by the merchant that receives the payment, for instance, a restaurant or clothing store.
Interchange fees are equal to around one percent of the purchasing price. That fee is then to be shared with Mastercard, the issuer of its debit card.
Interest & Overdraft Fees
Whenever a personal account holder has an unarranged negative balance, he or she will be charged with an overdraft fee.
Conversely, if you have an arranged overdraft (i.e., the customer has agreed with Starling on the overdraft in advance), no fees will be charged.
Depending on the customer’s credit score, Starling will charge an overdraft of 15 to 35 percent on the negative balance. The overdraft is charged on a daily basis.
Apart from overdraft charges, Starling also generates revenue from the interest that it collects whenever it issues a loan.
Business owners can apply for a loan. They will then pay a monthly interest fee that is dependent on their account balance, (projected) revenue, credit score, loan period, and more.
Transfer Fees
Starling Bank also charges a variety of fees with regards to retrieving and transferring money. Examples include:
- A currency conversion fee of 2 percent when receiving Euro into a British Pound account
- A 0.4 percent currency conversion fee (plus local bank fees) whenever transferring British Pounds into a foreign account
- £5.50 per transfer that utilizes the SWIFT payment network
Starling imposes these fees as a result of foreign deposit requirements. For instance, if you aim to transfer your British Pounds into a US Dollar account, then there needs to be a financial institution, on the other hand, holding that USD equivalent in reserve. This financial institution then charges a fee for facilitating that transfer.
Referral Fees
In September 2017, Starling Bank launched an online marketplace for both consumers as well as business owners.
The marketplace allows users to connect their Starling account with third-party applications. For instance, business owners can link their accounts with Zettle for in-store payments.
Starling Bank generates income from the marketplace through referral fees. If a user signs up for a service through Starling’s marketplace, the partnering company pays Starling for referring that user.
Banking-as-a-Service
As previously stated, Starling Bank has always had its focus on serving both consumers as well as business owners.
In October 2018, it made an important step to fulfill that vision. It launched a Banking-as-a-Service (BaaS) product which would allow user companies to take advantage of Starling’s payment technology and offer it to their own customers.
More specifically, it introduced its so-called Starling API, which allows other businesses to tap into Starling account and transactional data and use it within their own applications.
While pricing is not made public, it can be assumed that Starling charges some sort of licensing fee for tapping into that API (much like Plaid does for its open banking API).
Dozens of businesses, including Square, SumUp, or CreDec, are now taking advantage of its BaaS offering.
Interest On Cash
Starling, just like any normal bank, uses the cash residing on user accounts to lend it out to other institutions, such as said banks.
They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, net interest margin for all U.S. banks was equal to 3.35 percent.
This, furthermore, allows Starling to pay its users interest on the cash they hold in their accounts. Customers receive a 0.05 percent annual equivalent rate (AER) on balances below £85,000.
Additional Services
There are a few additional services that Starling offers. For instance, replacing a debit card costs £5 in the UK and up to £60 for overseas replacements.
Additionally, Starling Bank charges £20 whenever it has to certify documents pertaining to a customer’s account.
Starling Bank Funding, Revenue & Valuation
According to Crunchbase, Starling Bank has raised a total of $922 million across ten rounds of venture capital funding.
Notable investors include Goldman Sachs, JTC Group, Merian Global Investors, the Qatar Investment Authority, and many more.
During its latest funding round (Series D), announced in March 2021 (and extended in April), Starling was valued at around $1.9 billion.
Starling Bank has generated £97.6 million in annual revenue for the year ending on March 31st, 2021. Revenue has grown by close to 600 percent year-over-year. Loss after tax decreased by more than half to £23.3 million (from £52.1 million the year prior).
Who Owns Starling Bank?
As a company in private ownership, Starling Bank does not publicly disclose its ownership structure to the public.
Nevertheless, previous reporting has given some hints at its current cap table. Investor Harald McPike is still holding a significant ownership stake at around 40 percent.
He reduced his stake all the way from over 66 percent down to around 40 percent during the Starling’s funding round in March 2021.
Meanwhile, Anne Boden owns way below than 25 percent of Starling Bank, which is required to be classed as a “person with significant control” by Companies House since 2019.
Other shareholders include Fidelity, the US asset manager, the Qatari Investment Authority (QIA), or global investment firm Millennium Management.
If Starling Bank ever decides to go public, then its ownership structure will be revealed as part of the roadshow process.
