One of the first-ever challenger banks in the world is bringing its software to the U.S. It will face many difficulties unique to the U.S. market.
Starling Bank has registered its software unit, Engine, as a limited liability company in Delaware. It is exploring potential East Coast office locations for Engine in Florida, North Carolina and the District of Columbia.
Engine has started talks with potential candidates to be its U.S. president and anticipates building a U.S. team of about 10 people in the first year, covering product, engineering and sales — a mix of local hires and current Engine staff from the U.K.
When it started out, Starling was something new. Founder Anne Boden left her job as chief operating officer of Allied Irish Bank in 2013 to try to create "banking's equivalent of Google or Facebook," she wrote in her book, "Banking On It."
Technology was at the heart of the project. "I knew for a fact that every single major bank had to rely on legacy technology that stretched back to the seventies and eighties," she wrote. "Banks had not been able to keep up with evolving technology, not even close."
Today, Starling is a branchless bank that offers checking, savings and a marketplace of services from other providers like insurance and investments in the U.K. Users can manage their personal and business accounts on the app. It has 4 million consumer users and a half million small-business customers.
The bank has already brought its Engine software to other countries — it's used by Salt Bank in Romania and AMP in Australia.
"We're making good progress" in the U.S., Sam Everington, Engine's CEO, told American Banker, adding that several U.S. banks have expressed interest in the software. "These are long-term relationships, so having a trusted local team on the ground is an important part of that, and clearly something we're investing into to establish this space, as well as the investments we're making to the technologies as a whole."
Everington has led Engine for the past three years. Before that, he was deputy chief information officer at Starling for five and a half years.
"Starling Bank has had significant success in the U.K. and in niche markets in continental Europe," said Craig Focardi, principal analyst in Celent's banking practice. "While they have a banking license and bank in the U.K. where they built their software, they chose to grow by licensing their Engine solution internationally, not by acquiring banking licenses in other countries."
Starling plans to target the roughly 4,000 mid-tier banks, credit unions and community banks "in need of the next generation, cloud-native digital banking experience that Engine offers," the company said.
Selling points
Starling said its technology has enabled it to provide user journeys and operating procedures that have won it high customer satisfaction scores. In a January survey conducted by Finder, 93% of Starling customers said they would recommend it to a friend.
It also said its core system has made it possible to run at low cost. Starling Group, which comprises Starling Bank, Engine by Starling and Fleet Mortgages, has been profitable for the past three years, according to results the company
Starling's average cost per customer is a third of traditional banks' Everington said, yet its revenue is comparable.
"It's not just breaking even," Everington said. "Last year, it turned over 680.4 million pounds and made 300 million pounds in profit. Our average balances are equivalent to traditional peers. Banks from various parts of the world have come to visit us to try and see how Starling became profitable, especially in a period where most fintechs were losing money."
Starling's profitability is a positive factor for U.S. banks to consider, Focardi said.
This is the proposition for U.S. banks — an efficient core that can handle real-time transactions and offer low operating costs.
Focardi noted that Engine is still not a complete core banking solution. "It has retail deposits, savings accounts, credit cards and some consumer lending products such as auto loans," he said. "There is no commercial or corporate banking capability advertised. So any financial institution will need to consider the current limitations of Engine to meet their entire core banking technology needs."
Everington said Engine has built a better experience for customers. For instance, it developed an Airdrop-like feature to let family members share accounts, rather than making them come to a branch for onboarding. During the COVID-19 pandemic when bank branches were shut down, Starling's ability to open business accounts digitally was a differentiator, he said.
Focardi called the Airdrop-like feature "groundbreaking but not earth shattering. It won't be the reason why U.S. financial institutions buy Engine or not."
Engine is also scalable, according to Everington. The core system has been tested to be able to handle 20 million customers, he said, and "there's a lot of headroom beyond that."
Challenges of the U.S. market
Core banking technology in the U.S. has long been ruled by an oligopoly made up of Fiserv, FIS and Jack Henry. Almost three-quarters (70%) of U.S. banks have cores from these three, according to the Kansas City Federal Reserve. Fiserv serves 42% of banks and 31% of credit unions. Jack Henry serves 21% of banks and 12% of credit unions, and FIS serves 9% of banks and 3% of credit unions. CSI has about 7% of the market, Finastra and COCC each have 3%. Other companies that have tried to break into this market, such as Temenos, Oracle, Nymbus and Corelation, have had limited success.
"The highest hurdle for any new core system in the U.S. is signing up the first customer," Dan Latimore, chief research officer at the Financial Revolutionist, told American Banker. "Being the pioneer of a new technology brings increased regulatory scrutiny and uncertainty, increased work to deal with the inevitable bumps in the road, and a general overall level of risk not associated with systems already implemented at other U.S. banks. Overcoming these hurdles means that the product will have to be that much better than existing technology and the seller will likely need to make significant financial concessions to its launch bank."
Another challenge is that state and federal U.S. bank regulations are different from those of other countries.
"This requires a significant long-term commitment and financial resources from Starling just to create a base product for U.S. financial institutions to evaluate and consider buying," Focardi said.
Everington said Engine will localize the software for free, including adjusting it to meet regulatory requirements.
"Each market we enter, there's some work to do to localize it, not just regulation, but local market norms and conventions," Everington said. "There are different ways of doing things and different ways of calculating interest, for example, in each country. So yes, there will be some work that we will do, that we invest in."
Focardi said this is essential, because the small and mid-tier financial institutions Starling is targeting "will not consider a solution that is not ready for market, and they will not pay to co-develop it."
While some large banks have helped co-develop solutions from Thought Machine, 10X and others, "community-based and regional financial institutions lack these resources, although early clients and prospects will have to devote additional resources to Starling Engine solution development and testing because Starling has no U.S. customers," Focardi said.
Core banking systems must be localized as much for product as for regulation in a specific country, Focardi said. Checking accounts and loans in the U.S. have similar but different features and compliance requirements than current accounts in the U.K., he said. "All this requires additional R&D investments beyond regulatory compliance just to make Engine a minimum viable product for the U.S. banking market."
U.S. banks are conservative about buying from new suppliers, and their regulators scrutinize their tech purchases closely.
"For any new technology product, few financial institutions want to be first or on the leading edge," Focardi said. "Some like to be fast followers. Most prefer to be in the early majority or late majority of buyers. Community-based U.S. financial institutions tend to be in the early majority or late majority."
Like many banks, Starling has been hit with consent orders relating to financial crime controls and anti-money-laundering efforts.
"The problem has been identified, reported, remediated, and the process has been closed," Everington said. "That relates to control failings a number of years ago now that were organizational rather than technology system problems. The bank's worked very hard and invested heavily to fix that."
But the hurdles are not unsurmountable, as the occasional successes of
"Technology startups continue to bring innovation to banking markets across the globe," Focardi said. "While there is a lot of friction when banks consider a new core banking system, the componentized architecture of cloud native core systems is making it easier for financial institutions of any size to replace part or all of their core."
