Founded just one year apart, trading updates from two of the new fintech brands paint very different pictures, with Starling touting its projected profitability, while a more exposed Monzo deals with serious concerns it would be able to continue trading; so what’s happening under the hood?
Straight-talking, user-centric, and loss-making, UK neobanks Starling and Monzo are supposed to be everything that a high street bank is not. Yet following the onset of the coronavirus the relative strengths and weaknesses of differing strategies (and stages of development) are now stark.
Monzo’s 2020 report notes that the uncertainties that have characterised the economic impact of the pandemic, namely on revenue streams, and an unfortunately timed tightening of some regulation have “cast significant doubt” on the bank’s ability to remain a going concern. Its losses have grown from £47.2m last year to £113.8m.
Much of this is as a result of expansions: into the US, of headcount, and of its marketing power as the startup began to come to terms with the ceiling created by its, mostly urban, word-of-mouth strategy up until now. Not all is lost, however, as revenues more than tripled from just over £19m last year to £67m.
Starling Bank, meanwhile, provides a strong contrast; CEO Anne Boden wrote in a trading update that it remains on track to break even by the end of 2020, despite the shock of the pandemic, and is likely to make annual revenues of £80m. In the world of finance that may not be much, but in tech, that’s pretty good.
“At the heart of Starling’s strategy,” writes Boden, “is the smart use of modern technology.” Unlike the incumbents, which outsource or buy in their systems, “Starling has in-house engineering teams and its own core banking software running in the public cloud infrastructure.” But Monzo’s engineering set up is similar – both are known for their tech more than their financial nous. So what happened?
Timing is everything. Monzo was caught stretching, exerting itself with an attempt to break America through a partner bank. By comparison, Starling has focused on building its main base in the UK while exploring the option of an Irish banking licence in order to grow there.
Luck has been kind to Starling in this regard, but it has also built strengths in areas in which Monzo is far behind.
Loans have been key to Starling: since its full-year reporting in November of 2019, Starling’s loan book has grown from “less than £100m to more than £1bn .” It’s this established capability that handed the bank a significant advantage over its younger cousin: when the UK announced the creation of the government-backed Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme, Starling was able to get into action quickly, while Monzo was left behind.
Meanwhile, its other strength came from the March 2018 introduction of business banking services. As of the two companies’ updates, Monzo could only launch business accounts during the pandemic (though this points to a significant future revenue stream); Starling already enjoys that stream, with 200,000 business accounts.
A different cohort is also key to the neobanks’ divergent fortunes. Starling makes it a point of celebration that just over a fifth of its customer base are Londoners, reflecting the strength of a broader and more diverse customer base. Its users also skew a little older, with an average age of 37 and rising.
While the headlines that characterised the bleak reading of Monzo’s results focus on a deeply pessimistic phrase of accountancy-speak, the bank’s board remains confident in its ability to execute its business plan, much of which reflects the kind of stabilising activity that Starling has managed already. The relaunch of a premium £5-a-month Monzo Plus offering along with business accounts (of which there is a paid tier) and its young loans business point to maturity beyond its old bread-and-butter of international transaction fees.
Still, triple-figure layoffs at Monzo also indicate the real human cost of these issues, while Starling has been able to engineer a net increase of headcount of 147. In these difficult times, it’s not returns that should be celebrated as much as the protection and creation of jobs and opportunities. Failures here are more costly than ever.
It comes down to sustainability, with part of the equation reflecting a broader question in tech about how to move from a recurrent dating relationship with customers, to a recurring revenue model.
That’s the tech part. Starling’s positive news shows how the ‘fin’ part is equally important.
Sourced from Monzo, Starling; additional content by WARC staff