True innovations

Starling CEO, Anne Boden, tells Scott Thompson why the time is right for Starling and other digital startups to disrupt retail banking

Having worked in the banking sector for more than 30 years, Anne Boden has seen a lot of things change and a lot of things stay the same. In the 80s, reforms made by Margaret Thatcher’s government set off the Big Bang, transforming the way that the City operated and making it an international player. The City also expanded east, to Canary Wharf, something strongly backed and pushed through by Thatcher. Thanks to the sweeping changes she ushered in, driven by technology, financial services remains one of the few industries in which this country occupies world leader status.

More recently there has been an online and mobile banking explosion. And, of course, the financial crisis of 2007-2009, the effects of which are still being felt today. Yet throughout all of this upheaval, the status quo has remained in place, unloved but also unchallenged. There have been new entrants (most notably the supermarkets and Metro Bank) but the High Street continues to be dominated by the Big Four, with RBS, Barclays, Lloyds Banking Group and HSBC currently controlling almost 80 per cent of the current account market. “Banking has emerged from the financial crisis almost unchanged,” says Boden. “Unless the banking industry responds with true innovations that customers actually want, banks will become irrelevant. It is a hard message but most banking executives would accept this.”

It could be argued that they have to accept it, whether they like it or not. A palpable sense of change is finally in the air. The government is keen to see more competition and consumer choice, whilst users now expect and demand the same kind of omnichannel experience they receive from other sectors in their banking platform. The music industry has been transformed by iTunes, retailing by Amazon, whilst Uber are disrupting the taxi business. Safe in the knowledge that it’s in a special category (hence why governments bailed banks out left, right and centre a few years ago) banking hasn’t changed its approach in a long time. The same simple services traditionally offered in branches have just moved online and into apps. But that is no longer good enough in the eyes of empowered, tech-savvy consumers who want easy, intelligent banking, not just mobile versions of paper statements. It’s a pitch that is backed up by recent research from Intelligent Environments showing that one in eight Brits plans to switch their current account from a traditional to a digital-only bank. Additionally, one in three believes digital-only bank accounts will outnumber traditional ones within five years.

The company’s online poll of 2,000 Brits indicates that many feel more confident about this brave new world, in part due to the increasing importance of mobile and digital banking. Sixty per cent of respondents said mobile and digital banking services are very important to them, and 31 per cent believe that a digital-only bank would be better at this than a traditional counterpart. Additionally, 14 per cent would trust these newcomers more than a traditional bank, and 16 per cent believe they will have fewer security problems.

And so it’s over to Starling, one of the highest profile new entrants and a company whose story starts in January 2014. Having taken her leave of Allied Irish Bank (AIB) as chief operating officer during 2013, Boden started to work on her idea for a new UK digital retail bank, then known as Bank Possible. “I knew that London was the right place to launch a new bank with the recent changes in the new bank authorisations process and also the thriving FinTech community. The environment was right to bring a new bank to market. Throughout 2014, we worked with our partners to develop the proposition and prepare all the financial models necessary to launch a bank. For most of 2014, we kept our plans under wraps but towards the end of the year it was necessary to be far more visible. We cannot build our product in isolation, we need to be out there talking to our customers.”

The venture hit a roadblock earlier this year when chief technology officer and founding member Tom Blomfield, who had joined from FinTech startup GoCardless (of which he was a co-founder), departed along with other members of the senior management team. The Financial Times reported that, “two people close to the situation said the individuals’ contracts had been ended following friction with Boden.” Blomfield says he is contractually unable to comment but it recently emerged that he is building a rival service by the name of Mondo and is in the process of applying for a banking licence.

For her part, Boden insists that Starling is still on track to obtain its licence and launch this year as per schedule, and there are plans to bring more people onboard. “We have 12 senior executives and the support of our advisors and technology partners. We plan to grow to about 60 by the end of the year,” she says. “In the early years of most companies, there are departures. As a company grows you need different skills. This is especially true when you are starting a bank. The regulatory hurdles are high and not everyone is really prepared for the journey. We now have a very accomplished, experienced and talented team onboard. We have hired people who are world class in their field including John Humpish as chief customer and commercial officer and Paul James as chief operating officer who will lead the technology function. Paul combines deep technology experience in the banking sector with experience of the FinTech sector. He was previously COO at Calastone, a member of the FinTech50, and has the powerful combination of banking, technology and FinTech skills we need.”

Crucially, the central vision that came out of Boden and Blomfield’s collaboration remains unchanged. Throughout the ups and downs, the focus has been on building something that resembles Facebook or Google more than the Big Four, and is customer driven and technologically enabled, with state-of-the-art security. In short, a digital-only current account made for the smartphone generation. Boden had seen enough of the piecemeal advances made by traditional banks to know that it’s not enough to gradually add digital channels, biometrics and colourful interfaces to core systems. While previous (and successful) incarnations of digital banking such as Simple and Moven in the US have paired digital platforms with banking operators, Starling plans to integrate both from the outset. Its vision is built around the demands from younger customers, who want their banking platform to be intuitive, device agnostic, and, crucially, to operate in real-time.

“We will be providing a great current account with a debit card and access to a full range of payment services. We will also have an agency banking agreement for the very, very rare occasion when our customer needs a branch,” Boden says. She adds: “Our customers live their lives on their mobiles. You see them walking down the road fixated by the device they are holding in their hand. We are bundling a current account that looks and behaves like all the other apps on their smartphone but will offer a new type of financial product that is focussed on the specific financial needs of people in the 18-35 age group. We are many months away from launch so we do not want to give away the details of our offer too soon but it will be very focused on a target segment and provide this new financial product delivered in a format that they are used to.”

Starling aren’t, of course, the only new kid on the block. The government has tasked the Financial Conduct Authority (FCA) and its sister organisation the Prudential Regulation Authority with boosting competition in financial services. The resulting loosening of the red tape around gaining a banking licence and lowering of the minimum capital requirement for new banks has brought into play a number of challangers.

“UK regulators have changed the rules to enable new entrants to compete. Finally, the technology behind all the best internet platforms can be brought to banking, allowing us to create a digital banking service that’s truly personal to each customer,” she comments, adding that some of the UK’s newer banking entrants have been built on top of the systems of “old” banks – something she describes as “offering a new veneer on an old way of doing things and still delivering a bare bones service to customers...Starling offers something different. For the first time, it is possible to build a bank from the ground up, offering a truly mobile, personalised banking service.”

How, then, does Boden see her vision playing out against the likes of Atom, which is fronted by two heavy hitters, Anthony Thomson (the brains behind Metro Bank) and former first direct CEO, Mark Mullen, and which is also building a mobile-centric proposition from the ground up? “We are very different from some of the other new entrants but first I must say that the market needs new entrants and customers deserve choice,” Boden says. “The financial services market is huge and there is plenty of room for all the new entrants that offer something people really want. We believe that the banking market is dis-aggregating. The FinTech world is encouraging new entrants offering one product to a specific niche. Firms such as TransferWise and Zopa are challenging the traditional retail banking model. We intend to be the firm offering the best current account in the world in this mix. We will co-exist alongside other specialist suppliers and be best in class in what we do.”

The future
Before that happens, though, there’s the not inconsiderable matter of a banking licence to be obtained. It might be easier these days but it’s still a lengthy, expensive process, although Boden is full of praise for the changes that have been made. “We have been working with the PRA and FCA for almost a year now. We are working with them through the process of applying for a licence using the new authorisation process which was announced in March 2013. The new process allows the application process to be very consultative and is very supportive to new entrants.”

She continues: “We are ambitious and believe our model will be very relevant to many global markets. However, we are also pragmatic, we are applying for a banking licence and that means we must grow at a pace that does not compromise the service we deliver to our customers. We will be a bank and our customers’ deposits will be covered by the Financial Services Guarantee Scheme. Our number one priority is to ensure that we live up to the demands of delivering excellent service to our customers.”

Like all the other new retail banking entrants, Starling is playing a long game. There’s still a lot of work to be done before it comes to market. In addition to the banking licence, it is building IT systems in-house from scratch (“we are buying a number of commodity services and packages and then building a core banking layer that links it all together.”) There’s funding to be sorted. “FinTech attracted $12 billion of investment in 2014, up from $4 billion the year before, according to a recent Economist article. London now has a vibrant VC community focussed on FinTech where both the banking, technology and start-ups skills come together. There are now numerous funds chasing a limited number of viable businesses and Starling has had numerous offers and is now raising its next round of finance for regulatory capital. London is the place to be if you want to start a bank.”

And once it gets the greenlight it will enter a market dominated by FIs who are burdened with legacy issues but also boast deep pockets and a high level of brand awareness and long standing customers. People are, when it comes down to it, conservative with their money. Change might well be in the air, but the Big Four will take some shifting and will inevitably fight the fire in the young upstarts’ bellies with fire of their own. Perhaps unsurprisingly, given her incumbents background, Boden doesn’t think that there will be wholesale disruption as has been the case in other sectors. Omnichannel calls for banks to act as disruptors and reinvent themselves, creating a bank within a bank, for example, a new brand free from legacy, technology and culture issues. As someone who has been on both sides of the fence, she feels that many of them, although not all, are up to the challenge.

“Banks have great people but technology and change in large banks is very challenging. With my 30 years’ experience in banking technology, I know that it is not because of lack of dedication or effort. The legacy of thousands of systems and processes, combined with a mountain of regulatory change, means that innovation is difficult. Setting up a committee, an innovation centre or an incubator just does not make enough of an impact. Some of the banks today will survive stronger and fitter but some will disappear as customers vote for new offerings more aligned to their way of life,” she argues.

As for Starling, what is her vision of where it will be five years from now? “Our typical customers will be graduates from university trying to make ends meet, couples just moving into their first rented flat and the 30 year olds saving up for a mortgage,” Boden says. “Customer driven and technology enabled. The bank for the digital age. That’s what we are really aiming to become.”

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