A lot has happened recently, with the developer hackathon, partnerships with TransferWise and Moneybox, and the beta launch of your current account. A stock-take as to where you’re at?
It’s been very exciting; starting a bank is not for the faint-hearted. We’ve been going for three and a half years, and most of that time has been spent getting a banking license, building the infrastructure, putting the piping in place. We thought it was important to build things from scratch, and to have the things in place to do it well at scale.
We now have a banking license and a new banking system. We’ve integrated into all the payments schemes, we are Mastercard issuers, we are the 13th member of Masterpayment in the UK. We’re sticking with a current account and transactional services, but expanding to other countries. Current accounts are our core product, but they will co-exist with other products from other providers in the marketplace.
You said you’re looking to go into other countries? Are you looking to go Europe-wide on this?
Europe-wide, yes. Because current accounts are regulated quite highly by various EU directives – PSD2, PSD1 – it is managed very similarly across Europe. Europe also has a payments scheme, so we think our product is very conducive to a European rollout.
What impact will Brexit have – will it perhaps throw a spanner in the works with passporting?
It would be nice not to have Brexit, but there are bigger things to worry about in a European business. I’ve run big European businesses across the EU and in non-EU countries. You run them as one, and you recognize individual country regulations and individual regulators… European passporting is great, but in order to run a European business, that’s only one of five or six things that you need.
Do you have any timescales at this stage for a soft launch?
This year is all about the UK, probably next year .
Your model is the marketplace approach, where you focus your resources on building a current account in-house and outsourcing everything else.
Not quite outsourcing. Outsourcing means that that entity is doing functions on your behalf. The marketplace means that the customer has a relationship with those providers, and those providers are providing that service on their own balance sheet and their own brand. So outsourcing is “I need something done” and I subcontract it.
The marketplace is different. Think of a quality place, such as Borough Market, where people come to sell their wares. There are great places where we can select the best fresh produce, the customer buys it, and their relationship is with those providers. But if we bring together a series of providers that are not good quality, we will affect our brand. So it’s all about bringing together brands that we are proud of working with, and who are proud of working with each other.
Do you see your customers as having a relationship primarily with you or with them?
What we’re not doing is setting out to own and dominate the customer relationship. I’ve had so many conversations where people have said “OK, we need to capture the customer, and now we’re going to cross-sell to them, and that customer is ours.” Well, that’s wrong. Customers are too intelligent, and people have moved on. They are very well informed nowadays. We’d be very arrogant to say that we can direct the customer. We have to offer the best, and the services and tools that the customer can decide [to use], and respect the customer to make a good decision.
Beyond your two existing partners [TransferWise and Moneybox], is there anything else in the pipeline, anything on the credit side, for example?
Yes, we have a list of people who want to talk to us, and we’re working through that. Now that we have our license, have our cards in the marketplace, and consumers can sign up, we are in a situation where people are coming to us much more. And we can select the right ones.
How will the API integration work?
There are people who come along and just want to use the API. And then there are the more strategic partnerships, the people offering products on our platform, where the API goes both ways. In this scenario, we need to be able to open an account for our customer on their platform.
So imagine you have someone who is providing a long-term savings product. We KYC the customer, and we then need to open the account for the customer on their platform. And the customer needs to be able to move from one system to the other. We will curate the partners that are appropriate for our customers.
I read recently that you envisaged the marketplace going beyond purely financial services, into lifestyle, retailer-type integrations?
That is not just for the sake of doing something that is outside the scope of financial services, but where financial data has a relevance to that particular segment. So imagine you have a motoring app – having integration with your banking transactions for motoring would be relevant: how much do I spend on motor insurance? How much do I spend on petrol? So it isn’t that you’re branching off in random ways, it’s that you’re branching off into things where there’s a financial connection.
The current account market is very sticky, riven by inertia. Seven-day switching has had no impact and switching rates are in decline. It’s a very challenging market for you and other new entrants, so what are you doing to maximize acquisition rates?
You don’t think of this as a current account. If you think of a situation where we give you £200 to switch, you’re starting in the wrong position. We have a proposition where we start off by getting people just to use the account. It’s very simple to enroll – you can get an account in under two minutes. You just download the app, we have a limited amount of information we can use to KYC you and do all the various checks. You record a selfie, with a phrase, and you have the account opened. And you can stop during the process if you feel uncomfortable, and just play with the app. And then you can use it, and you should get benefit from it immediately. You download your card, you can start using it there and then.
You can choose to switch, or you can use it and not switch. If you want to switch, you can partially switch: we allow you just to switch certain things. We’re the only bank that allows you to switch on your mobile. We’ve taken the whole “it’s a big, big, thing to switch your bank account” to being a little thing. Our strategy is not to buy customers, our strategy is to make this place where people want to be, by putting interesting products in there so that people can enjoy it. And if they feel comfortable, to switch.
In terms of making money, I presume there’s some sort of revenue-sharing agreement with your partners in place?
Our business model was never predicated on having revenue share for customers. We don’t want to be driven by, or make decisions, on what the basis of the revenue share is. All the propositions we put forward to investors and regulators are not based on revenue-sharing, they’re based on making a little bit of money on current accounts and overdrafts.
Setting that aside, we will revenue share on certain products. But the primary reason for having the products in the marketplace is to make it an attractive place for customers to be. If you start making decisions around who gives you the biggest revenue share, it’s the wrong way for the business to go.
You mentioned overdrafts as being a source of revenue, but if your product is based on helping people manage their finances more efficiently and effectively, then presumably they’re less likely to go overdrawn. So are you limiting your revenues from that?
People often ask me the question, if you’re trying to get people to a healthier financial life, why is your revenue source overdrafts? We don’t fine people for going into an unauthorized overdraft, we don’t have unauthorized overdraft fees, we just have a simple overdraft interest rate, which is 15%, which we think is very fair. A huge percentage of people have borrowings, and we believe that having borrowings with us at that interest rate is far more compelling and fairer than some of the other rates on offer in the market.
We’re seeing a lot of players enter the market, all in a relatively short period of time. We’ve got Atom, Monzo, and Tandem. Is there a risk that the market is being flooded with too many new entrants in too short a time, chasing too narrow a segment of consumers?
I think the market is very big, and having emergent, digital challenger, new generation bank entrants is good. Doing this with multiple people in the marketplace is easier than doing it on your own, because you create a conversation. If you look at the different ways that people are entering the marketplace, there are not many people doing digital banking on a mobile for transactions. Atom hasn’t launched a current account yet, and Tandem has given back its license.
So there’s Monzo and ourselves. Both of us have built our technology, we’re both going after slightly different markets, and the fact that the other one is there is good for both of us.
Doing a current account is extraordinarily difficult. You have to be very good at technology, very good at operational risk, and you have to be comfortable with the product. I’ve run current accounts and transactional banking around the world; I’m used to managing the liquidity issues and the operational risk issues. This is something that most people back away from because it takes so long to do. I doubt whether there will be many other competitors entering the marketplace, saying “I’m going to spend three years going through this process to get a current account.
I’m proud of where we’ve got to, but there are very few of us.
Do you have a projected date when you’re going to start breaking even?
It’s probably going to be a couple of years. Our ambition is to invest in this business and grow this business. We are well funded and we are heads-down, working on making this product better and better.
For more on Starling Bank and other new entrants, please read our new report New Entrants: Mapping the Landscape.
By Daoud Fakhri, Prinicipal Retail Banking Analyst