As traditional banks struggle with downturns and regulatory scrutiny, a once-soaring digital challenger is facing its own reckoning. Starling Bank, the British online-only upstart launched in 2014 to disrupt legacy lenders, has found its meteoric rise tempered by serious compliance shortcomings that led to a multimillion-pound fine.
Founded by banking veteran Anne Boden, Starling quickly gained prominence among a new breed of branchless neo-banks, outpacing rivals Revolut and Monzo in securing a full UK banking license by 2016. With backing from Austrian billionaire Harald McPike and a focus on cutting-edge tech, Starling seemed poised to reshape retail banking for the digital age.
Pandemic Lifeline Proves Double-Edged Sword
The Covid-19 crisis initially appeared a boon for Starling, as it eagerly participated in government-guaranteed lending schemes to help shuttered businesses. The bank’s bounce back loan portfolio swelled to £1.6 billion by March 2021, a 70-fold increase from its pre-pandemic lending. Business customers surged from 87,000 to 330,000.
Yet this rapid growth, fueled by taxpayer-backed credit with scant risk controls, would sow seeds of trouble. Former minister Lord Agnew accused Starling in 2022 of lax vetting and using the loans as a “cost-free marketing exercise” to inflate its loan book and valuation. CEO Boden fiercely denied the claims.
“Shockingly Lax” Safeguards Exposed
Behind the scenes, however, regulators had been flagging “wide-ranging concerns” over Starling’s financial crime controls since 2020. Sample reviews found “several significant gaps” in anti-money laundering procedures – shortcomings known to management but inadequately reported to the board and authorities.
Further lapses emerged: hundreds of banned customers regaining access, automated screening checks failing for years, new high-risk accounts opened in breach of voluntary restrictions. In late 2023, watchdogs termed Starling’s safeguards “shockingly lax“, leaving the system “wide open to criminals“.
The FCA fine is a serious blow to Starling’s reputation and IPO hopes. It makes it harder to ‘sell the story’ to investors.
– John Cronin, Independent Banking Analyst
Hard Lessons and an Uncertain Future
October 2023 brought a reckoning in the form of a £29 million penalty from the Financial Conduct Authority. The fine, which may wipe out most of Starling’s 2024 profits, was an indictment of weak oversight by an inexperienced management lacking regulatory and financial crime expertise.
As founder Boden hands the reins to new CEO Raman Bhatia, Starling faces pressing questions over its growth-at-all-costs mindset and readiness for public markets. With a tarnished image and lingering compliance woes, the neo-bank’s journey from disruptor to established player is proving a turbulent one – a cautionary tale for the fintech insurgents seeking to upend the banking old guard.
For Starling and its peers, the message is clear: in the unforgiving world of finance, even the most innovative challengers cannot afford to stint on the fundamentals of sound governance and rigorous compliance. How they adapt may determine whether the neo-bank revolution can truly take flight.
