LONDON — Britain is going through a retail banking boom right now, with several new, app-only banks setting up shop.
Starling was one of the first. Anne Boden quit her position the COO of Allied Irish Bank (AIB) in 2014 to build a mobile-first bank and has been doing that ever since. This week the company received its full banking licence and is set to launch to the public later this year.
But Starling faces competition. Last year Atom became the first app-only bank in the UK to launch to the public and Monzo, set up by Starling’s first CTO Tom Blomfield, is also poised to launch app-only current accounts. Tandem, another startup, is also targeting retail customers but has been hit by a funding setback.
Business Insider sat down with Boden at last week’s Innovate Finance conference in London to discuss competition in the market, the challenges of building a bank from scratch, plans for profitability and growth, and her relationship with Blomfield today.
Here is the transcript of the interview, edited for clarity and brevity.
Oscar Williams-Grut: What are the big changes that have gone on in the business in the last year?
Anne Boden: It’s been very exciting because we’re now in a situation where we have a current account, which has all the things that a normal current account has, plus lots of other things which we are developing and iterating all the time.
We announced our APIs yesterday, that was very exciting because we’ve got the first APIs directly connected into a UK current account. We have an API that goes directly into Faster Payments, that’s very exciting.
We decided that the best way of launching those APIs into the world was a hackathon so we tweeted about our hackathon and hundreds of people applied. We picked 100 to come to an event which we held at Google Campus. We were thrilled that we had great reception. People started using them, figuring it out. We gave them their own cards and own account so they could use either their own data that they had generated or our sandbox.
We’ve had great feedback — people saying the APIs are amazing and they had a good time, which is the most important thing.
OWG: What’s the reason for the hackathon? Is this to differentiate yourself from competitors?
AB: I think the idea is we don’t intend to do all the products for all the segments through all the channels. We don’t think that by doing that — by setting out to be a little RBS or a little HSBC — we don’t think that adds anything and I don’t think a company can really innovate on that many levels.
We’re focused on doing one thing and then living in a marketplace of other products
What we’re really focusing on is the day-to-day transactional banking needs, your current account, and giving you all the access to all the payment systems you need. And then use that data to give you insight.
If you want other products, we will help you because we’ve KYC’d [know your customer checks required by the regulator] you and we understand you, your spending behaviours and so on. We’ll know the other products you can buy from other providers, on their balance sheets. We’re not arrogant enough to say we can provide the best mortgage or best long-term savings product.
We’re focused on doing one thing and then living in a marketplace of other products. We recently announced a partnership with TransferWise. We’re also partnering with MoneyBox. Now that’s a great example of linking bank account data to people who are addressing a specific need. We’re building up this marketplace and we intend to be the glue, the curator in the middle of it all.
OWG: How will you make money? Current accounts are famously loss leading.
AB: We’ll make money on overdrafts. So, everyone reckons that current accounts are loss making but that’s because all the banks say they’re loss making. I spent 30 odd years in retail banking and I know how they have come to that conclusion.
They have all the products, mortgages, current accounts, all the product lines, and then they have all the costs and they decide where they’re going to allocate the costs — we have the branch network, 80% of the cost goes to current accounts; payment systems, goes to current accounts. They load up the costs and all of a sudden current accounts are loss making. So they say, we’ve got to cross-sell now to recover the cost of selling the current account.
If you don’t have those costs in the first place, the current account is profitable. Think very simply of the economics. You have balances sitting on an account. You’re paying around 0.5%. It’s low single digits. You’re lending out the money as overdrafts, you can, say, lend half of it. You lend that out at between 12-19%. There’s a difference.
The difference between us and the big banks is we don’t eat up that difference with all the cost of infrastructure. We’ve built everything from scratch. Unlike all the other new banks who are using someone else’s infrastructure, we can deliver this cost effectively.
OWG: On overdrafts — 12-19%, are those actual figures?
AB: At the moment that’s the range depending on an individual’s credit rating. It’s a reasonable interest rate. I’m saying the number because it’s not high.
That’s how we make money and if you talk to any of the big banks and you ask them about current accounts — they look at it in a different way.
AB: I think the market is very, very big. Looking back to when I started this back in 2014, we had a marketplace in our presentations to the FCA [Financial Conduct Authority] back in June 2014. It’s always been something close to my heart.
If you look at where we are, Atom haven’t launched a current account yet, I don’t think Tandem are going to do it, so it’s probably only Monzo and ourselves in that marketplace. I think the market’s big enough.
OWG: How many customers have you got at the moment?
AB: I think we’ve got about 500. The idea is we’re going to build that up now rapidly.
OWG: When will you go from beta to full launch?
AB: I think it’s when our customers feel comfortable with the service. I think we’ll probably have another couple of months of beta. It’s hard to define what a beta is. We’ve got a fully functional current account that can do everything that a Barclays or HSBC could do, so in some respect, it’s not really a beta. But we want to make sure we take on board all the feedback we get from our customers.
OWG: How many staff have you got at the moment?
OWG: Are you worried about your cash burn rate? We’ve seen some redundancies with Tandem recently. It seems like building a bank is expensive.
AB: The number one thing is: starting a bank is very difficult. We’re in a situation where there’s an awful lot of talk about lots of people going for banking licenses but if you actually take them one by one, there aren’t that many people with retail banking licenses that get through to the end.
There are phases of different sorts of banks. The first phase of new banks were the Aldermores and the Shawbrooks. What they were doing was a consolidation of lots of people doing specialised lending.
Then there were a lot of SME banks that came along, like OakNorth or whatever, which are not really technology driven banks but are dealing with the business that the big banks are not really interested in doing because they’re too manual.
Then you’ve got the latest round of banks, which are the consumer banks — the Atoms, the Tandems, us, Monzo.
You do need an awful lot of money. Starting a bank is very difficult because seed funding is very difficult to obtain because EIS and SEIS schemes [tax-efficient investment vehicles] don’t apply. It’s quite difficult to raise money for a proposition that’s going to be revenue generating in three years or three and a half years. That doesn’t typically fall into the VC model. The VC model wants to invest in businesses that will be revenue generating very soon.
Starting a bank is not for the faint-hearted. But it’s ever so worthwhile. There are lots of fintechs based on pre-paid models but those models are very difficult to get revenue generating. Or rather, they’re easy to get revenue generating, very difficult to get profitable. There are so many people in the value chain. Although it’s quite good in raising customer expectations and customers getting used to nice new things, it’s very difficult when so many people are taking a piece of the pie. That’s why we believed we had to be a bank because we have a viable business model.
OWG: Do you need to raise money?
AB: We’ve got enough money for years. [Ed. note: You can read more about Starling’s funding here.]
OWG: Are you planning to raise money?
AB: We’ll probably raise more money as we go into the end of the year but we’re sufficiently funded for the coming years.
OWG: You talked about ramping up the growth in terms of customers, how do you plan to do that?
AB: I’ve spent 30 years in an industry which has become very jaded about trying to acquire customers and sell to customers. I think if you offer good value and you offer a proposition which is innovative, people will migrate to it.
Starting a bank is not for the faint-hearted. But it’s ever so worthwhile.
People can try before they buy. If you look at the existing incumbents, they entice you to switch. But you don’t have to switch. We believe customers will like something different. Lloyds and Barclays sound the same, look the same, but they have got a different carpet.
OWG: What will customers see that is different to a traditional bank?
AB: What we’re working on at the moment is — I don’t want to fall into the trap of saying it’s wonderful, it’s gorgeous. I think people should experience it for themselves. It’s very easy, it’s very functional and it has all the functions that nowadays people come to expect: freeze the card, the usual sorts of things.
OWG: It sounds like a Catch-22 — you think people will switch because it’s a different product, but you have to try it to understand it. It’s almost an “if you build it, they will come” type thing.
AB: No, there’ll be a number of things that we’ll do to make sure people know about it. I think that we have the whole thing about being different, we have the marketplace platform whereby we’re associated with great brands so their customers know about us. We also have the social media and plans to be out there talking to customers where they live their lives, instead of expecting customers to come to us. It will probably come alive over the next couple of months.
OWG: Do you have an idea of who your target market is?
AB: I think we initially talked about 20 to 45-year-olds but it’s all sorts of people. One of our customers is somebody in the office’s mother who is in her 70s and using it to manage a limited budget. But it’s for the people who are prepared to do all their business on a mobile. We believe in delivering everything in a convenient form and that’s what we’re doing.
OWG: I asked colleagues and on Twitter if anyone had any questions for you, and the number one question that came back was what happened between you and Tom Blomfield [Blomfield was Starling’s CTO but left to found Monzo]?
AB: (Laughs) I’ve known Tom years. I met Tom when I was an advisor to GoCardless [a direct debit startup Blomfield cofounded]. Tom joined us for a short period of time, September 2014 and left in February . I think Tom wanted to do his own thing and he is doing his own thing. Tom and I occasionally have breakfast and, you know, the market is big enough for both of us (laughs).
OWG: So you’re still on good terms?
AB: We’re still friends. I think I spoke to him last Wednesday.
OWG: Do you speak to the other guys — the Tandems, the Atoms?
AB: It’s a small world. Ricky [Knox, cofounder of Tandem] has popped in to our offices, and I’ve gone to see him. I don’t go to Durham very often to see Atom I must admit.
We all as an industry went into the crisis and came back out and I personally don’t think enough has changed
Our competition is the big banks. What we’re doing is raising customer expectations, introducing competition.
We all as an industry went into the crisis and came back out and I personally don’t think enough has changed. Technology has changed, expectations have changed, and regulation has changed. The banks were too busy and too internally focused and I really wanted to do something different.
So I quit my job to start this, and it’s really great to be so near customers. It’s really great to be using technology. I love the fact that we can do things so much easier nowadays. We can do interesting things and why shouldn’t we do it in banking? This is ever so fulfilling. Every time we talk to customers and they tell us how much benefiting their getting — it’s exciting.
OWG: Are you in touch with the big banks? Are they sniffing around?
AB: The big banks want to come and see us every week. On a typical week, you’ll get three or four emails either from consulting firms wanting to bring around people on a visit, or you’ll get people who’ve set themselves up in business doing fintech tours.
OWG: Fintech tours?
AB: Yes! (Laughs) Then you get contacts from overseas who want to come and talk to us. We have to be very careful with our time. Sometimes it’s very hard to say no because we want to be friends. But there’s a huge amount of interest in what we do and I have a bank to build.
OWG: What does building a bank look like in 2017? Where do you want to be at the end of the year?
AB: For us, this year is going to be a year of building our marketplace. It’s going to be really getting out there. We’ve spent a long time testing, we’ve been testing now since July. It’s now a situation of getting out there with real customers and making it work.
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