Starling vs. Monzo

For the past five years, Fintech fanatics have closely followed the unofficial competition between Starling and Monzo to be top in the new league of banks – the challenger banks.

The topic has long been debated with respect to the end-user benefits which pit the two banks against each other on their app features, their customer service and even their card design. But how do the two banks compare as long-term, successful, financial institutions? What can businesses and banks alike learn from their differing strategies in their race to be number 1?

1. Volume of customers alone will not necessarily drive revenue and make you profitable. Define your strategy to attract a certain type of customer.

For a while, Monzo seemed to have a clear lead in the race against their top competitor, Starling. With its hot-coral debit card, matched with a sexy app with never-before-seen banking features, Monzo very quickly capitalised on the millennial market. And in 2018, they rapidly sailed past the 1m customer milestone. Starling didn’t hit this milestone until over a year later (at which point Monzo had flown past 3 million). On the face of it, many Fintech enthusiasts thought the race was won.

It is no secret that putting a challenger brand through a period of rapid growth is a costly endeavour. But, yes – last year, despite the onslaught of challenges inflicted by the pandemic, Starling hit the ultimate impressive milestone – profitability.

But they would have been wrong. In 2020, Starling Bank answered the much-asked question by investors, enthusiasts and onlookers: Will the challenger banks ever be profitable? It is no secret that putting a challenger brand through a period of rapid growth is a costly endeavour. But, yes – last year, despite the onslaught of challenges inflicted by the pandemic, Starling hit the ultimate impressive milestone – profitability. How can this be? With far fewer customers, how have the underdog won the ultimate race? The answer is simple. While Monzo celebrated their millions of customers and cult-following status within the millennial market, Starling had attracted a clientele which would actually generate lucrative returns. While Monzo attracted hoards of London-based millennials, Starling’s customer base as it passed 1 million had an average age of 35, with 75% of customers living outside of Greater London.

Know your customer

This customer base went hand-in-hand with distinctly more positive spending insights. While evidence suggested that Monzo’s millennials were topping their accounts up bit-by-bit, the average balance in a Starling personal account at the end of 2019 was £932. This indicated that users were having their salary paid into their accounts and using it as their primary bank account, as opposed to an on-trend accessory.

To quote Starling’s CEO herself, Anne Boden, at 2019’s year-end,

“It doesn’t matter how many customers you have if you haven’t figured out how to be profitable and are spending huge amounts servicing unprofitable accounts. What matters is how people are using your bank.”

How right she was.

This seemingly unattractive market turned out to be populated by those who would be more likely to use Starling’s loan facilities; people who consistently hold deposits in their accounts and also open a Business or Sole Trader Account. Which brings us nicely to lesson #2.

2. Be ready to not just respond to disruption, but to capitalise upon it.

2020 rolled around and both of the digital banks seemed to be flying in their own right. Monzo had set sail to the United States and Starling’s business bank offering had officially taken off. Hordes of new Marketplace offerings landed on the Starling app to provide SMEs with the ultimate business banking toolkit. Then COVID-19 hit the UK, and both banks had to quickly revise their strategies. The way the two banks handled this crisis can be put down to one differentiator: developing things the customer base needs, versus developing the nice-to-haves.

Starling quickly responded to the pandemic, and what it meant to their customers. Most significantly, they were one of the first eight British lenders confirmed to be offering the Government-backed ‘Bounce-Back’ loans. Within 24 hours of announcing their involvement in the scheme, Starling attracted nearly 2,000 new business customers. This move also cemented the trust of their existing customers that they were a real, reliable business bank with access to offerings just as good as the legacy lenders.

The way Starling Bank and Monzo handled the COVID-19 crisis can be put down to one differentiator: developing things the customer base needs, versus developing the nice-to-haves.

On the retail banking side, Starling quickly rolled out the Connected Card. This allowed isolated customers to provide others with access to funds so they could pick up their groceries. They also launched the long-awaited cheque imaging proposition, allowing customers to cash in cheques without leaving their homes. These were not just attractive gimmicks, nor nice-to-haves, but essential tools and features that customers had quickly come to need. Perhaps thanks to this ability to be agile and willingness to reprioritise, Starling continued to grow throughout the pandemic. They furloughed no staff, made no redundancies and despite the unpredicted nature of 2020, hit the profitability milestone before year-end.

A lesson in priorities

Meanwhile, Monzo was hit hard by the pandemic, with their key revenue streams slashed. This was down to the cut in Bank of England interest rates; the lack of overseas transaction fees; and the millennial market tightening their purse-strings for lockdown, not spending or sending money. Their Las Vegas support office shut up shop. Hundreds of staff were furloughed, and the Executive team took 25% salary cuts. In contrast to Starling’s rapid roadmap re-prioritisation, Monzo kept their sights set on the not-so-must-haves, such as the launch of the Plus and Premium offerings. Both offerings costed their customers £5 and £15 per month respectively for the privilege of a limited-edition card design and other nice-to-haves such as advanced round-ups and custom categories. Perks featured unfortunately-timed fee-free cash withdrawals when abroad, free travel insurance and discounted airport lounge access.

Come to the 2020 year-end, and Monzo still focus their efforts on the non-essential banking features. For example, providing their customers with the much loved year-in-review. Yes, these are things that some customers love. But how could these efforts have been repositioned to develop propositions their customers need. Or more crucially, will actually use to manage their finances?

Product roadmaps and rollout strategies are fundamental for any business looking to roll out cutting-edge new features to customers. However, a review of Starling vs. Monzo in 2020 provides us with the ultimate lesson in re-prioritisation, and not being afraid to diverge from the plan. It demonstrates that yes, an attractive in-app experience can drive excitement among customers. However, what really matters to your customers, and what business leaders must prioritise, are the best-in-class features which their customers need. Simple and fast onboarding flows, seamless payments experiences, intuitive banking interfaces, propositions which solve your customers’ real problems; this is where the money is.

Going for gold

Although the race between Starling and Monzo to the eternal challenger bank top-spot is far from over, Starling did seem to take a clear lead in 2020. But, as we have seen over the past five years, this industry is heavily dynamic; both must continue to compete not only with one another and their other co-challengers, but also the incumbents who are slowly but surely taking note and catching-up (or at least trying to) with the challenger offerings. With significantly more resources (but in spite of clunky, legacy architecture), mainstream retail banks such as Barclays and HSBC are slowly showing signs of catching up with the innovation train. They are launching propositions such as cheque imaging, spending insights and in-app card management (features mostly debuted by the Challengers).

That being said, there are lessons any business can learn from analysing what’s gone right (and wrong) in the last year for the challenger banks. First, number of customers alone does not equal profitability or sustained success. You need your whole strategy to align in order to make a proposition profitable. Second, don’t be afraid to prioritise and re-prioritise your roadmap. Sometimes putting a seemingly great idea on the back burner is the best way to get your most relevant propositions over the line, when it counts most. Finally, just because you seem to have nailed a brilliant proposition, don’t take your foot off the gas. Equally, don’t lose sight of the end goal. Building from the ground up takes time. In order to guarantee sustained success for any business offering or proposition, leaders must have patience and keep their business’ ultimate goals in mind.