Another shake-up in the UK banking landscape is on the cards but this time the big banks won’t get things all their own way, writes TERRY MURDEN
A decade after the crash that left the financial system close to ruin, big banking is back and flexing its muscles.
First came speculation that NatWest Group, the controversially-retitled Royal Bank of Scotland, has been casting eyes at Edinburgh-based Sainsbury’s bank.
Last week the Spanish bank Sabadell indicated that it would be putting another Edinburgh-based bank TSB back on the market, with private equity players expected to pounce. Virgin Money, fresh from its re-emergence as the re-branded Clydesdale Bank, is also itching to gain scale.
It has now emerged that JPMorgan Chase & Co and Lloyds Banking Group have expressed interest in buying Starling Bank, the digital only operator which has attracted 1.8 million customers since its launch only three years ago.
The sale of Starling could lead to the first big merger of an established lender with a startup in Britain and has drawn particular interest from JPMorgan which is preparing to launch a consumer bank in the UK in the new year. Lloyds is said to be more interested in Starling’s technology.
It was never meant to be like this. The “challenger” banks created in the wake of the crash were supposed to weaken the big banks’ grip on the market and provide a greater choice for consumers.
Yet in spite of the takeover fever now gripping the corporate finance markets, the established players may not get things all their own way. Changes in recent years, driven by the fintech revolution, have not only strengthened the challenger banks’ defences, they have enabled them to start up and grow more quickly and with greater strength.
One key factor driving the boom in newcomers is the rise of ‘ready-made’ banking technology which has allowed consumer fintechs to outsource their tech layer and to set up cheaper and faster than their predecessors.
Indeed, much has changed even since Starling and others such as Monzo were in their infancy. Gone are the days of having to build an entire banking stack from scratch. Instead, so-called ‘fintech enablers’ rent out their core banking infrastructure to the neo-banks. Examples of these infrastructure-fintechs include Germany’s Solarisbank and the UK’s ClearBank.
Not only has Starling benefited from the new enabling technology, it has plugged into a change of culture in which customers are seeking something new from their banks
It means digital banks can now spend less time building technology, and can focus more on investing in disrupting the sector. In doing so, the new wave of neobanks could also potentially avoid heavy initial losses.
Indeed, Starling which was founded by Anne Boden in 2017, made its first profit of £800,000 last month, becoming one of the few tech-focused finance start-ups, including Transferwise and OakNorth, to be in the black. It was one of the beneficiaries of the government-backed bounce back and business interruption loan schemes which saw customer numbers rise sharply.
It has seen a fourfold increase in revenue compared to 12 months ago, a third higher than its last trading update three months ago.
It has opened a data room as part of a plan to raise £200 million in new funding and while JP Morgan and Lloyds wave their wallets and beat their chests, CEO Ms Boden has expressed an ambition to remain independent and float the bank on the stock market.
Not only has Starling benefited from the new enabling technology, it has plugged into a change of culture in which customers are seeking something new from their banks – not least a change from what is still seen as a tarnished establishment.
Ms Boden says customers join Starling for the features that help them manage their money and their businesses in a more effective way.
“They want to be part of the Starling ecosystem with its range of current, joint, euro, dollar and business accounts,” she said after releasing the trading figures last week.
With cash in the bank, Starling is preparing an assault on European banking markets.
“I’m certain that we will become a formidable competitor in the European banking market as we gear up to scale across Europe,” says Ms Boden. “We know that our technology is hugely scalable because our tech team runs a constant simulation at around ten times our current capacity. We’re prepared for a sudden influx of customers and transactions.”
Aiming to bridge the old with the new is the Scottish entrepreneur Martin Gilbert who stepped down as vice-chairman of FTSE100-listed Standard Life Aberdeen in May to take the chair at Revolut.
He is hoping to turn it into a one-stop shop for a customer’s finances and “global super-app”.
The app was created in 2015 by former bank traders Nikolay Storonsky and Vlad Yatsenko. Based in London, it started off as a travel card providing low-cost foreign currencies, undercutting the banks.
Since then, it has attracted more than 13 million customers. It has branched into share trading, insurance products and commodities including gold. It has expanded globally, spanning Europe, North America, Asia, and Australia and is now estimated to be worth $5.5billion (£4.1billion), making it one of Europe’s most prized tech start-ups.
Mr Gilbert, who created Aberdeen Asset Management in 1983, join Revolut in January to guide it through its next crucial phase: launching banking services, such as savings accounts and loans, in the UK and US.
Some question whether this will turn it into another bank, rather than an alternative financial institution which attracted customers in the first place.
“We’ve set out to disrupt the banks, yes, that’s correct. But you do want to be a bank yourself, it’s more advantageous than not,” he told the Mail on Sunday. “It would help us enormously, I think, to be our customers’ major bank account, to actually be a bank.”
Revolut has not yet applied to the watchdogs for a banking licence as its first goal is to turn a £107m loss, three times higher than the previous year, into a profit.
“Our aim is to be profitable on a monthly basis at some point next year,'”said Gilbert. “We’re being tough on costs at the moment, and just making sure we have sufficient capital to run the business without having to raise more money.
“If we start applying for [bank] licences and we need more regulatory capital, we would have to raise more money. But again, that’s much easier if you’re profitable, so what I would say is we don’t need to raise any more capital at this point in time.”
Mr Gilbert, who led Aberdeen through an £11 billion merger with Standard Life in 2017, described his latest role as “a bit like going back, I suppose, to Aberdeen, when I first started”.
“It’s definitely still got that feeling of being a small company. I suppose because I was sort of regarded as a bit of an entrepreneur in the fund management sector, it was thought I might be able to work with Nikolay, which I find very easy to do. But I also had the experience of working with shareholders and regulators worldwide. So I thought I could help.”