Why change is not the enemy
Nothing surprises and delights me as much as the ability to change. I begin the year excited by the opportunities for change and for good that I believe lie before us in 2023, but mindful also of the very difficult circumstances we find ourselves in.
In many organisations change is seen as something to wrestle into submission, to contain and to fear. But to view change as an enemy stifles innovation. At Starling we like change - it’s why we exist, after all.
In 2019, we were awarded £100 million from the Capability and Innovation Fund, which was created to bring about change in banking and to “develop and improve the financial products and services which are available to SMEs [small and medium-sized enterprises]”. We’ve invested that grant in building a better bank for SMEs in the UK. I’m pleased to confirm that this programme came to a successful conclusion in December 2022, with all of our commitments delivered, subject to approval. Starling now commands an 8.9% share of the UK market for SME banking and we have brought genuine competition and innovation to a market segment much in need of it.
Our talent for execution, coupled with a hunger to learn from our customers, are among the reasons why Starling now sits at the top of the latest independent banking performance tables compiled by the UK government’s Competition and Markets Authority (CMA). Should you wander into a branch of one of the big High Street banks, you’ll see a prominent notice on the wall with Starling’s name in the No.1 spot for overall service quality for both personal and small business accounts. (For those of you outside of the UK, posting these results in branches is a CMA requirement.)
Changing our role in Financial Services
Becoming a leading player in the banking market takes some getting used to and this change of role presents its own challenges. Starling was always the underdog; the diligent, hardworking, socially aware, tech-savvy fintech. Never as cool as those businesses run by those 30 year old tech bros. But as we have seen, markets have a nasty habit of correcting. Many start-ups and scale-ups are having difficulty raising funding now. And it’s fair to say that for a while some private market valuations became inflated, with predictable consequences for some.
Starling, though, is different. We’re profitable, very well capitalised and have no need to raise money. It’s no accident that we have never sought a silly valuation, even when the prospect of one was dangled before us. We, and here I mean the fantastic Executive team, just had difficulty buying into the fanciful views of the world held by some of the funds that had so-called “Vision”.
Recently I was at an awards dinner when a well known venture capitalist leaned over to inquire, “What’s it like to have won?” His comeback when I asked him to explain was brief, “Well for many years you were trailing - you weren’t cool. Now you’re leading the pack!” I was quietly horrified and quickly replied,“No, no, we still have so much to do. Don’t dismiss everyone else.” And that says it all. We believe complacency to be one of the biggest threats to business performance and progress. Far better, as the sage says, to be restless, to be constantly striving, to be as competitive when we have three or four million customer accounts as we were when we had just thirty or forty.
Not that changing positions is easy or comfortable. It isn’t. The upstart challenger gets the plaudits. But with success, that fades. Now that Starling is successful and profitable, it seems to be fair game for criticism. I get that.
When you change positions, you also change who you mark (please note that I have only recently got into sport - it needed Starling to sponsor the UEFA Women’s EURO 2022 to do it). We’re no longer up against the plucky scale-ups. We are now a big player when it comes to serving the current account market in the UK and find ourselves rubbing up against the establishment, as our CMA results show only too well. I recently asked a journalist why there are so many Starling stories; “Clicks,” they shot back. “You do so much, so people read Starling stories.” Well, I suppose that is fair. Indeed, it is useful too. Without examination, discussion and criticism, it is hard for anyone to see mistakes or obstacles and to correct course.
One thing that Starling will not change in 2023 is our commitment to innovation. While we have lofty ideas about our part in the evolution of financial services, we built Starling to deliver banking services and products that are really useful. What I’m most proud of in the last couple of months is the launch of free virtual cards. Anyone with a Starling personal account can have access to them; no premium subscription required.
A bit like the smartphone, the virtual card is one of those innovations that people didn’t know they needed until it was invented. Virtual cards work just like normal debit cards, but exist only in digital form. With Starling they are linked to Savings Spaces within the app, allowing people to better track and manage their spending. In 2015, some questioned why we were building our technology from scratch at Starling; “Why do it the hard way?” they said. Well it’s precisely for moments like this, so that we can build interesting new things better.
All change on the metrics
So how do you measure change; how do you know that you are changing for the good? Because what really matters is not just sentiment, it is numbers, financials and comparators.
We are a sophisticated financial institution, with deep expertise across our financial, treasury and capital markets teams. Because of this, our hierarchy of metrics at Starling may differ considerably to that at many other fintech businesses.
With more than 3.4 million customer accounts, including 520,000 small business accounts, we expect to more than quadruple our pre-tax profits in our 2023 Annual Results. We generated annualised pre-tax profits of more than £250 million on the back of almost £600 million of annualised revenue for the month of December 2022. Our balance sheet and asset strategy continue to develop and as of the end of December 2022, total deposits stood at £10.7 billion.
Our lending portfolio, at £4.7 billion, continues to grow, with more than £3.1 billion being in our growing residential and owner-occupied mortgage books. We are delighted that Fleet, the buy-to-let mortgage specialist we acquired in 2021, completed £1.2 billion of mortgages in 2022, despite the turbulent mortgage market; this was up 58% on the figure for 2021.
A changing world
Last year I wrote my New Year blog in what we then thought was the aftermath of the pandemic. This year the backdrop offers additional challenges of a different sort, the cost of living crisis, the war in Ukraine and a series of key worker strikes among them.
Many people are dealing with the rising costs of living; the fortunate are having to swap luxuries for necessities, while some of our most vulnerable are having to make decisions between basic foodstuffs and heating.
At Starling we’re doing our best to support our customers, as usual, to listen sympathetically to people’s individual circumstances and help explain the options available.
I won’t say too much about the change in Prime Ministers or many of the other political upheavals of recent months. We are now all hoping for a period of stability.
And then there is the biggest change of all, Climate Change. In November 2021, we announced the outcome of our first carbon emissions audit, our ambitious reduction targets and our commitment to offset emissions from our own operations and supply chain annually.
We built on this in 2022, completing our 2021 offsetting programme early in the year, implementing several reduction initiatives, actively participating in industry bodies such as the Partnership for Carbon Accounting Financials, finalising our second emissions audit, launching our Green Shoots Ambassadors (a group of enthusiastic employees supporting the delivery of our sustainability projects) and preparing our application to the Science Based Targets initiative.
In 2023 we’ll be investing in innovative projects through our ongoing carbon offsetting programme that delivers against several of the UN’s Sustainable Development Goals, supporting both renewable energy initiatives as well as carbon capture projects.
How Starling is changing
In 2022 we increased our employee headcount by a third, to reach 2,300. We ended the year by announcing the creation of 1,000 new jobs in Manchester, where we’ll soon be opening an office to complement our existing bases in London, Southampton, Cardiff and Dublin.
Our best resources at Starling have always been our people. In July 2022 Tony Ellingham retired as Starling’s Chief Financial Officer, having seen us through the early days with wisdom and dedication. His replacement as CFO was a natural fit: Declan Ferguson joined Starling as head of strategy in 2017 and has been a key player in our growth story ever since.
Another early Starling employee, Sam Everington, previously head of engineering, was the natural choice to lead our next phase of growth as CEO of Engine, Starling’s new Software as a Service (SaaS) subsidiary. We’ve big ambitions for Engine, a cloud-native, full-featured, and flexible banking platform which we believe will help us become a world-leading technology company.
This is a New Year blog, so I will finish on a few predictions.
I remember the Dot.com boom and the Dot.com bust. I well recall sitting in a conference room debating whether adding .com to the end of Aon would boost our valuation. Now that a number of so-called “tech growth companies” have been found out, I expect, or rather hope, that in 2023, the market will be a bit more savvy.
Now to cryptocurrencies; I have been criticised for Starling’s stance on crypto. One day crypto will be safe and highly regulated on an international basis with protection for consumers and businesses. And one day I can see the potential. But this is not where we are today. Right now, crypto is lacking sufficient practical and moral purpose. I call for regulators to ensure that crypto exchanges are regulated to the same standards as other financial institutions: if they are not regulated, then they cannot continue to trade.
And finally, unusually low interest rates post the financial crisis of 2008/09 may have gone forever. We now think of 3% being high, but it is actually low. How does the Venture Capitalist world fare in a higher interest rate environment, where unprofitable tech ‘unicorns’ with valuations bloated by cheap money are running out of runway and where investors in funds have alternatives? After ten years of optimism that innovation lies in the hands of start-ups, we may have to face up to the fact that there is a power shift to more boring corporates. I hope not. It’s up to those of us who set out to use technology to disrupt markets to keep the faith and to make sure that we continue to innovate and to delight. Which brings me back to where I started: change.
Starling set out to change banking for good by building an app based on customer need and utility, overlaid with a beautiful user experience. We’re delighted to see that banks around the country, indeed the world, are now copying many of our most popular features. It is proof positive that even in the most traditional of industries, imagination, hope, determination and ambition (plus a little luck) can bring about meaningful change.
As always, I’d like to thank our customers and all of my colleagues for helping us to make this possible and to wish everyone the best for 2023.