Challenger banks don’t really challenge proper institutions… but wait!

A few months ago, FinanceFeeds made the distinction between fact and unsubstantiated bluster with regard to the influx of challenger banks onto the UK and US market which have arrived alongside a deluge of advertising propaganda which is visible across London, New York, Chicago and many other major financial cities hailing the end of the road for the traditional, well funded and utterly stable Tier 1 financial institutions and a new road ahead for investors who are offered the virtues of unstable, unbacked and debt-ridden new entities which tenuously call themselves ‘fintechs’, steered by wet-behind-the-ears former employees of said institutions who have managed to talk themselves into a vast sum of venture capital.

And for venture capital, read debt.

The almost evangelistic flannel that had been touted by the financial mainstream media regarding the wonderful new age of showing the old guard a clean pair of heels has been almost as nauseating as a socialist party pre-election campaign, however many individuals believed that somehow there is something ‘tech’ to go with the ‘fin’, and that these new entities with no track record and no money are somehow a better and more modern option than tier 1 institutions with an AAA credit rating in top quality financial centers.

We pointed out that absolutely none of them have made a profit, that there are no unicorns, and that once the endless venture capital that is being thrown at them with no underwriting runs out, they will be bankrupt, and we have already seen some of them go that way including flagging Metro Bank which is teetering on the brink of obscurity.

Today brings some news in the opposite direction, as for the first time since launch, Starling Bank has broken even.

Yes, you read right. Broken even. And somehow this is something Starling Bank sought to broadcast from the top of the highest mountain it could find.

Whilst HSBC, Barclays, JP Morgan, Citigroup, Goldman Sachs and Merrill Lynch, all Tier 1 banks with massive investment banking divisions from which liquidity is sourced by FX counterparties worldwide and whose traditional banking divisions huge corporations, governments and entire economies utilize without blinking make tens of billions of dollars in profit per year without even trying, Starling Bank has boasted this morning of a ‘rare’ challenger bank milestone, stating that it has made a profit, which is amusing enough, however for those with an eye for detail, it actually turns out to be a break even.

If any of the mainstream banks broke even, they’d face a huge bank run. The lines for withdrawal would be miles long and the regulatory sanctioning would be heard across the globe.

With nearly 1.8 million accounts, £4 billion in deposits and £1.5 billion of lending, Starling generated £9 million of revenue for the month of October 2020, which represents an annualised run rate of £108 million.

Anne Bodin, Starling founder and CEO says: “This gave us a positive operating profit of £0.8 million for the month of October 2020, or £10 million on an annualised basis.”

That is less than profit made by many privately held retail FX brokerages, let alone banks entrusted with deposit accounts.

Revenue at the mobile-only bank is split £5.5 million of net interest income and £3.5 million of gross fees and commissions income. It represents a four fold increase in revenue compared to 12 months ago and is a third higher than its last trading update three months ago.

Operating costs have increased by 30% in the past year, while customer accounts almost doubled and fixed costs have broadly remained flat over the last 12 months.

The average balance in retail accounts stands at £1,625, with £14,900 for business accounts and £3,100 for sole trader accounts.

“We’ve never ‘bought’ customers with cash incentives, or promotions,” said Ms Boden. “We don’t have jazzy metal cards and we don’t offer ‘perks’ such as access to premium airport lounges. Customers join us 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.”

This statement demonstrates that they know where their market is – right at the very bottom.

With cash in the bank, Starling is preparing for a fresh 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,” said 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.”

What technology? It’s hardly the BARX single dealer platform, or an in-house multi-asset trading platform. It’s an iPhone app at best and my nine year old son can develop those.

Starling says its ultimate goal is a float on the London Stock Exchange. Speaking in January, Ms Boden said:v”I didn’t do all of this to sell out to a big bank. I think the future for us will be an IPO in two to three years’ time. We’re demonstrating a path to profitability that other digital banks have not.”

Indeed, other challenger banks are still making losses, and Starling has broken even. Never mind an IPO, it doesn’t meet the criteria to list on London Stock Exchange. Let’s revisit this in a couple of years’ time when a high street bank buys its assets for $1 from the receivers, and the customers are quietly glad that the high street banks exist, otherwise they’d lose all their money in the event of insolvency.

Such an event would also expose the false claims of ‘tech’ to be exactly what they are. A ‘bank’ with no branches in which customers use a mobile app to see their balance does not classify as a financial technology company.