Ten years ago, three fintech startups with nimble ambitions: Starling, Monzo and Revolut, charged the British banking industry.
They have a mission to reinvent financial services by combining cutting edge technology with superior customer service and sleek mobile user interfaces.
Early success was phenomenal. Customer bases swelled. The market share increased. Investors and customers were captivated by the three neobanks, which rode a wave that was digitally-driven enthusiasm promising to disrupt century-old banking practices.
Now, however, they are on different paths.
Revolut Monzo both enjoy record-breaking growth. Starling was once considered the poster child for British fintech but now faces a financial and reputational crisis.
Starling stumbles amid regulatory problems
Starling’s results for the year 2024 revealed that profitability had dropped sharply. The post-tax profits fell to PS223 millions from PS301millions in 2017.
This was due to the escalating operating costs which rose to PS403 from PS332 millions, dwarfing their modest increase in revenue of PS32 to PS714million.
After the Financial Conduct Authority handed down a PS29million penalty to it for failings serious in their financial crime control, things came to a head.
Starling, between September 2021 to November 2022 opened more than 54,000 new accounts without following the necessary compliance procedures for customers who were deemed “high risk”.
The FCA described the failures of “shocking laxity” in the measures taken to combat financial crime.
Starling had to set aside a provision of PS28,2 million for potential losses on loans made under the Bounce Back Loan Scheme.
These loans were intended to help small business owners during the pandemic but did not meet the requirements for government guarantee.
Starling took the money and did not seek reimbursement from the taxpayer.
David Sproul said that Starling had resolved “some important legacy issues” and acknowledged the importance of the problems faced in the last year.
Unrest within and declining momentum
Starling has experienced internal turmoil that is not limited to the balance sheet.
Staff unrest has been reported at the company after Raman Bhatia, its new chief executive, issued a directive that required workers to report to their offices at least 10 days per month despite reports of not having enough space for them.
After Bhatia’s arrival in 2024 the policy led to an exodus of employees.
Starling has seen its growth in customers slow down. Number of customers increased by 10%, to 4.6 millions — half of what it was the year before.
Monzo, on the other hand, saw its customer base increase by 31%, to 9,7 million customers, in 2024. Deposits also grew 88%, to PS11,2 billion.
The annual report will be released soon. But the neobank has already attracted attention because of a planned PS6-billion listing on London Stock Exchange. This is one of UK’s biggest IPOs this year.
Revolut reaches profitability milestone
Revolut was once the controversial member of the three. In recent months, it has become the largest winner.
This year, the company has not only reached 50 million global customers but it also made more than PS1billion in profits. It is a huge milestone for an organization that has been plagued by regulatory delays and questions about governance.
This achievement places it even ahead of HSBC when it comes to customer numbers. It highlights the drastic changes underway in the financial landscape.
Revolut has overcome many scaling issues by expanding internationally, launching aggressive products, and diversifying revenue streams.
Starling Engine: Can it restart growth?
Faced with these challenges, Starling is now betting on Engine, its software-as-a-service (SaaS) subsidiary, to turn the tide.
Engine’s contribution to the group revenue was only PS8.7million in the past financial year. This represented a 284% increase.
Bhatia, who describes North America as “a huge opportunity”, has set his sights on revenues in the region of PS100million over the next few years.
John Cronin of Seapoint Insights questioned if Engine could alone save Starling’s larger business model.
She said that “Starling had no other choice than to increase the level of risk – this was not something we discovered yesterday or today.”
Its low scale, and lack of operational leverage that results from it (standardised credit-risk modelling), high risk weights and higher funding costs for deposits mean they simply cannot compete with the mainstream banks. What competitive advantages has Starling?
Starling service still ranked highly
In an independent study, Starling and Monzo were ranked as the best banks for their overdraft service, with First Direct rounding out the top 5.
In the survey, which was conducted to meet regulatory requirements, Monzo, Starling and Chase were ranked in the top 3 for service quality overall, beating out legacy banks like Lloyds Bank, Barclays HSBC and Santander.
The Sun published a report in March based on research by Finder.com that found 40% of UK adult have a digital only bank account. This is up from 24% and 36% respectively in 2023, 2024.
Another 17% who do not have a bank account said that they plan to get one, with 7% planning on opening one within the year.
Users are satisfied with the Trustpilot ratings. Starling, Monzo Revolut and JPMorgan Chase have all received over four stars.
The average rating of mobile apps across iOS and Android is 4.8 out of 5 stars.
The post UK’s digital banks have divergent fortunes. Starling stumbles while Monzo and Revolut soars. This article may change as new information becomes available.
