The journey of building a neobank from the ground up

The British digital challenger Starling Bank has attracted much attention since its launch in 2014, given its audacious start with a full banking license. In this episode of Talking Banking Matters, Starling Bank’s founder and now former CEO, Anne Boden, talks about why she chose that strategy and how she made it work. Our discussion took place earlier this year. Recently, Anne announced that she would hand over the reins to a successor, Starling COO John Mountain. She remains a nonexecutive director on Starling’s board, in addition to her work as chair of the UK taskforce on women-led, high-growth enterprises. The following edited transcript presents highlights from the conversation.

Matt Cooke, McKinsey: Starling Bank rapidly gained market share since its launch, with 2.4 percent of all UK retail bank accounts and 9.4 percent of the United Kingdom’s small and midsize enterprise banking customers so far. For comparison, the big, established banks that Starling competes with have at most 10 to 25 percent of retail banking market share in the UK. In addition to going up against some of the oldest banks in the world, Starling seeks to also partner with those institutions by selling them the technology on which Starling is built.

Starling’s founder, Anne Boden, is a big reason for the buzz the start-up generates. A technology enthusiast with a gregarious personality, she came up through the ranks of established banks, including ABN AMRO and AIB. The experience of the financial crisis of 2008 spurred her to begin looking around at fintechs, including a brief stint as an advisor at [the British payments start-up] GoCardless, and she became fascinated with the future of banking technology. What resulted was not just a new bank but also a second business, Engine by Starling, a cloud-native banking SaaS [software-as-a-service] company.

We started by having Anne explain her journey from traditional banks to founding a neobank.

Anne Boden, Starling: I’d already spent a whole career in banking technology. I was head of transaction banking at ABN AMRO Bank when RBS bought it. So I was in the transaction banking field. But then I stepped away from that and spent a year going around the world talking to organizations after the 2008 financial crisis.

I tried to find out what they were all doing, and everybody was giving me the same story: “We’re going to refurbish the branches. We’re going to move on to mobile.” I came to the conclusion that none of those strategies was going to work, because they weren’t fundamentally looking at the technology and reinventing. So in January 2014, I quit what I was doing to start a new bank based on everything I’d learned.

… Everybody was giving me the same story: ‘We’re going to refurbish the branches. We’re going to move on to mobile.’ I came to the conclusion that none of those strategies was going to work, because they weren’t fundamentally looking at the technology and reinventing.

Anne Boden, founder, Starling Bank

One of my main reasons was that I thought lots of big banks have lost confidence in change and doing projects. These big organizations have forgotten that life and technology have moved on, and it all moves faster now.

One of the things I did after I left AIB was to serve as an advisor at GoCardless. When there were really only four of us there, they’d tell me, “Oh, we’re going to write the risk report this evening,” and I’d say, “But that’s a month’s worth of work,” and they’d answer, “No, no, we’ll do it tonight.”

Technology has moved on. Things are much more doable now. One of my big challenges when I started this journey was old knowledge. I had been absolutely 100 percent certain that I knew how to run projects and how technologies would run. I was wrong. I had to advance with the technology and learn to move faster.

Now I’ve got the best of both worlds. I have the history of the old world, but I can convince people who only know the old world that the new world is possible.

Matt Cooke: Starting a whole new bank, as Starling did, is an unusual approach. On the face of it, this would seem to be a tough choice, given the competition. Anne described why she chose the monetization model and how Starling became a sustainable business in a crowded field.

Anne Boden: When we started, the press was constantly writing about how the way we were doing it was counterintuitive: we went out and got a proper banking license, which made us later to market than others, who were starting smaller with prepaid cards and all that.

I understood the economics of retail banking, though, and I came to the conclusion you had to have new technology and a new way of engaging to make it all happen. However, the first time I used the words “I’m starting a bank,” I shocked myself, because it didn’t seem possible.

I started knocking on doors of law firms and various organizations, looking for help. But the pitch was a bit too audacious. I’d go in and say, “I’ve spent my whole life in technology in banks and in operations, and I’m a transaction banking specialist. I think if I started a new bank based on new technology built from scratch, I could be as big as Barclays one day. You’ve only got to give me the money, and I’ll do it.”

And guess what? Nobody believed me! People thought building new technology was impossible and also impossible to build from scratch. We would go back and forth. They would ask, “So you’re going to build a bank. What are you using as your core banking tech?” And I’d answer, “We’re going to build that.” Then, “How are you going to use card processing? What about the apps?” I’d say, “We’re going to build those. We’re going to build the whole thing.”

And it went on like that. “How are you going to get customers to switch to you?”

“They’ll switch because the product will be so good.”

“How will you make money?”

“The product will be so good we won’t have to pay to acquire customers.”

“How fast can you build it?”

“We’re going to do it in five years’ time, and we’re going to have a full banking license.”

“Do you have any money for this?”

“Not yet, but there are enough people who believe this is possible, and they’ll join the journey.”

I spent two years doing this. Then one day, an article came out about the coming transformation in banking, and an investor who read it contacted me, and we spent three or four days talking. I was looking to raise $3 million; he invested $48 million.

Matt Cooke: In addition to being undeterred by the enormity of the task before her, Anne was also dauntless when it came to naming the new bank.

Anne Boden: Starling birds are quite noisy and confident, and they work very elegantly together as a team. They also invade other birds’ territory, and they win. That resonated with us. We also did a lot of research about trust, and we wanted a name that meant something.

Matt Cooke: Along with its banking business, Starling also provides the core banking technology it runs on to others, meaning that sometimes its competitors are also its customers. Engine by Starling, as the company is called, is no mere side business. Rather, it addresses a key pain point for most established banks, which have many layers of legacy technology that slow their attempts to compete with fintech disruptors. Anne talked about why she is keen to serve this core technology transformation market, too.

Anne Boden: I’m a technologist at heart, and I’ve been in banking and banking technology for many years. My vision for Starling was to build a great new tech stack and then offer banking technology services on a SaaS basis to banks all around the world.

We’ve always believed that if you build the technology from scratch in an API-enabled way, it can be plugged together easily or pulled apart as needed and linked into other providers in our marketplace. That was important to our strategy.

When we started Starling, I made a list of 17 areas where existing technology was holding us back: having the right data structures, systems that are highly permissioned, the ability to do lots of different things on this platform, and data to enable prompt decisioning. And we’ve built it all. We intend to sell the technology to banks in the UK because this is our home market, but we want to provide it as software as a service, rather than banking as a service, which I define as having a banking license component. Providing the software, whether to the biggest banks in the world or the second tier, is where we’re focused.

Matt Cooke: We wondered how Engine by Starling’s customers think about using the technology. Are they migrating their customer base onto it right away? Or are they moving more cautiously by starting a separate business to see how it works before moving more of their business onto the platform?

Anne Boden: Flanker brands are very popular. Established banks often want to start a new digital bank to see if it works for them, and after that, they will migrate their platform onto it. Or they’ll launch a new product on the new platform to move into an adjacent line of business; maybe a retail bank decides to move into business banking, and they decide to use us for that. Or some want to update individual parts of their core technology, rather than doing it all at once. Maybe their KYC [know your customer] and AML [anti-money-laundering] compliance procedures need replacing.

Whatever their needs, for us it’s all about explaining, being confident about doing things, and showing how it can be done. We get people up and running in nine months, so it’s also a matter of giving them confidence that things are going to move at this pace.

Matt Cooke: Starling’s product design and target segment choice helped the new company acquire a customer base quickly and build trust with a core group of customers. This is typically a tricky needle to thread for new banks and fintechs, which often end up offering some kind of incentive to attract customers. Here, Anne talks about how Starling’s approach let them avoid this.

Anne Boden: From day one, people knew they were dealing with a real bank, and our KYC and AML were bank standard. We picked up people who are families, people who are older and have a bit more money. Those customers tend to be easier to serve and more profitable. We have less fraud, fewer chargebacks, and there’s a higher trust value.

Being highly trusted means we can acquire customers quite cheaply. Other organizations have actually paid people £5 per account. We’ve never given any money for an account, because we believe doing so devalues us. This way, we have fewer but higher-value customers.

We started with retail, then built business bank accounts, and now we have half a million business accounts. And we offer a wide array of features. That’s the liability side. On the asset side, we have the usual overdrafts and lending, but we also buy mortgage books, and we own a buy-to-let lender.

Matt Cooke: When we asked Anne to talk about how she keeps innovation going and maintains the confidence to do things like begin making loans, she talked about Starling’s culture, how the company views talent.

Anne Boden: We have quite the culture at Starling. We all love learning, and we love building technology. We are very capable of doing regulatory applications, or building models, or doing analytics. Our staff are highly qualified and highly paid. Lots of start-ups hire inexperienced people and cheaper people. We pay well. We don’t pay bonuses; everybody gets stock.

The senior team and I are very visible, very involved in the detail. We tend to hover and dive, but we also let people get on with their jobs and have a lot of responsibility for execution. When there’s an issue, we all dive into the problem. We don’t have regular one-on-ones with anybody.

All of us may be working on a document together or in the detail. We all love numbers, love the intricacies of doing the job, and are very hands-on. We believe that decisions should be made at the right level in the organization, where people actually have knowledge. We’re very open and transparent, and we don’t mind mistakes, because we correct them very quickly, learn from them, and move on.

It’s a really odd thing to say, but everybody at Starling is quite pleased with themselves. We’re all happy about what we’ve managed to do, and it’s very fulfilling.

Matt Cooke: Given the core technology challenges faced by long-established banks and the increasingly rapid pace of change in financial services generally, we asked Anne to talk about how she sees the next five to ten years unfolding in banking and payments.

Anne Boden: Let’s put it in the context of fintech. I think the first iteration of fintech was taking certain parts of the value chain—international payments, whatever—and doing it better than the banks, at a lower price. The big banks can respond just by dropping their price, and then you’ve got fintechs addressing the underserved at high cost. But Starling is going head-to-head with the big banks for their principal customers, with a different cost base. And that dramatic difference in cost base allows you to take market share and improve service.

The conversations on the boards of big banks have changed from “We’re worried about these fintechs taking a bit of our business” to “They’re actually competing head-to-head for mainstream business.”

That said, I think there’s going to be a shortage of newcomers in the next couple of years because of the stock price crashes in the tech sector. The big banks are going to be making lots of money from higher interest rates. There’s a gap. And how are those big banks going to use that gap? Are they going to use it just to sit on their laurels, or are they going to use it to take the resources available to them to transform? Because the new banks are not just coming after the business the big banks don’t want. They’re coming head-to-head, and therefore you have the gap and the time to do something now.

If you look across Europe at present, the people who’ve been trying to provide those services in those retail verticals are having difficulty finding the additional revenue. Conceptually, it seems like a good idea. But who pays for it all? Lots of financial institutions can provide rails; all those models have been created in order to keep the cost down for the retailer. But nothing actually gives real added value to the customer.

Although there’s a lot of activity and a lot of capability in that space, I see much more potential—money to be saved and value to be delivered—in tackling the billions and billions in costs that are sitting with the major players. That is where the revenue streams are going to come from.

Matt Cooke: It’s probably not unexpected that Anne’s advice for others is as unconventional as the rest of her start-up story. To date, Starling is the only bank in British history founded by a woman, in a country where women were only allowed to open their own bank accounts beginning in 1975. And 40 percent of Starling’s leadership team is female—an unconventional statistic in the banking world.

Anne Boden: Somebody asked me yesterday, “Who is your mentor, Anne? Who do you discuss things with?” I said I’ve never had a mentor. If I’d gone to somebody as a 54-year-old woman who’d spent her whole career in banking tech and said, “I’m going to start a tech company and a bank,” people would have said, “No, you’re mad. Don’t do it.”

If I’d gone to somebody as a 54-year-old woman who’d spent her whole career in banking tech and said, ‘I’m going to start a tech company and a bank,’ people would have said, ‘No, you’re mad. Don’t do it.’

When I said, “I’m going to write a book about the whole experience and be honest about what happened,” they said, “No, you can’t do that. It’s too much of a risk.” But I did it, and it was serialized in the Sunday Times. If you try hard enough, and you’re brave enough, and you’re audacious enough, I think you can pull things off. So the next target is, I’d like to be the organization that powers the world’s bigger banks on a SaaS basis. Nobody has ever done it. I think it can work, and I’m already working with people who are trying to make it happen.

Matt Cooke: Throughout her own personal journey, Anne Boden found success through what seems to be daring innovation and fearless curiosity. Similarly, her creation, Starling Bank, has proven itself a formidable force and disruptor in the UK banking space. We, along with many of you, have questions yet to be answered about Starling’s future: When will the bank go public? Will it be able to continue challenging incumbent banks? We did ask Anne about whether Starling will hold an IPO, but she said they’re in no hurry to do so, given their current funding, but eventually they would “do something.” In announcing her decision to step down as COO in May, Anne said she had decided that Starling’s current position as an established bank put her dual roles of CEO and large shareholder in conflict, and that she had chosen to focus on her role as a shareholder.

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