Why Monzo and Starling’s fortunes are so different

Founded just a year apart, business updates for two of fintech’s new brands paint very different pictures, with Starling touting its projected profitability, while a more exposed Monzo faces serious concerns about the possibility to continue to negotiate; so what’s going on under the hood?

Breakthrough, user-centric and loss-making, UK neobanks Starling and Monzo are meant to be everything a big bank isn’t. However, after the appearance of the coronavirus, the relative strengths and weaknesses of the different strategies (and stages of development) are now glaring.

Monzo Report 2020 notes that the uncertainties that characterized the economic impact of the pandemic, particularly on income flows, and an unfortunately programmed tightening of certain regulations have “cast significant doubt” on the bank’s ability to remain in business. His losses fell from £ 47.2million last year to £ 113.8million.

Much of this is due to expansions: in the United States, its workforce and marketing power as the startup began to accept the ceiling created by its predominantly urban word-of-mouth strategy so far. Not all is lost, however, as income has more than tripled from just over £ 19million last year to £ 67million.

Starling Bank, on the other hand, offers a strong contrast; CEO Anne Boden wrote in a commercial update that he remains on track to strike a balance by the end of 2020, despite the shock of the pandemic, and that he is expected to achieve annual revenues of £ 80million. In the world of finance it might not be much, but in technology it is pretty good.

“At the heart of Starling’s strategy,” writes Boden, “is the intelligent use of modern technology. Unlike incumbents, who outsource or purchase their systems, “Starling has in-house engineering teams and its own core banking software running in the public cloud infrastructure.” But Monzo’s engineering setup is similar – both are known for their technology more than their financial acumen. So what happened?

Timing is everything. Monzo was caught stretching, striving to break America through a partner bank. In comparison, Starling focused on building its main base in the UK while exploring the option of an Irish banking license in order to expand there.

Luck has been kind to Starling in this regard, but she has also developed strength in areas where Monzo is far behind.

Loans were the key to Starling: Since its annual report in November 2019, Starling’s loan portfolio has grown from “under £ 100million to over £ 1 billion”. It was this established capability that gave the bank a significant advantage over its younger cousin: when the UK announced the creation of the Coronavirus Business Interruption Loan Program and the Bounce Back Loan Program, Starling was able to spring into action quickly, was left behind.

Meanwhile, his other strength came from the introduction in March 2018 of corporate banking. Based on updates from both companies, Monzo was only able to launch business accounts during the pandemic (although this indicates a significant future revenue stream); Starling already benefits from this flow, with 200,000 professional accounts.

A different cohort is also the key to the divergent fortunes of neobanks. Starling makes a point of celebrating that just over a fifth of its clientele are Londoners, reflecting the strength of a larger and more diverse clientele. Its users are also a bit older, with an average age of 37 and on the rise.

While the headlines that characterized Monzo’s grim reading of results focus on a deeply pessimistic expression of accounting language, the bank’s board remains confident in its ability to execute its business plan, including much of it. part reflects the type of stabilizing activity that Starling has already handled. The relaunch of a premium Monzo Plus offer at £ 5 per month as well as corporate accounts (of which there is a paid tier) and its young lending business are maturing in excess of its former international transaction fees.

Yet the triple-digit layoffs at Monzo also indicate the real human cost of these issues, while Starling has been able to generate a net increase in workforce of 147. In these tough times, it’s not the returns that need to be. celebrated as much as the protection and creation of jobs and opportunities. Chess here is more expensive than ever.

It comes down to sustainability, part of the equation reflecting a larger question in tech about how to move from a recurring attendance relationship with customers to a recurring revenue model.

This is the technical part. The positive news from Starling shows just how important the ‘aileron’ part is.

From Monzo, Starling; additional content by ARM staff