01 Jun 2023

Britain’s fintech glow-up as British fintech’s grow-up

There’s positive news out this week from two of the UK’s most talked about fintech businesses; Starling and Monzo. Matt Village, Financial Services Associate Director and Fintech Expert, explores the results.

Matt Village

It’s no secret that the UK’s fintech sector has been going through a turbulent time recently.  In the past few weeks alone there have been stories around crumbling valuations, regulatory uncertainty, and about the viability of the UK as a region that can truly create a ‘tech powerhouse’. Amidst ever-shifting macro-economic conditions the sector remains firmly in the spotlight, and that’s not going to change anytime soon…

Among all the noise, there’s positive news out this week from two of the UK’s most talked about fintech businesses, everyone’s (kind of) favourites – Starling and Monzo. No strangers to the headlines, both businesses have this week released 2023 annual reports, and the results are well worth diving into.

If you’re so inclined, and happen to have a spare few hours, you can go through the full reports here (a cool 206 pages) and here (163 pages) or alternatively, you can read on for a quick overview…

Let’s start with Starling.

TLDR: Massive profit as revenue spikes.

Here are the headlines:

  • Revenue rose from £216m to £453m (up 109%)
  • Profit jumped from £32m to £195m (up 509%)
  • Much of the revenue increase can be linked to interest income rising to £349m from £122m (up 186%) but interchange fees also played a smaller part
  • Starling’s customer deposits stand at a healthy £10.6bn – higher than Monzo’s at £6bn and Revolut’s at £7.4bn
  • Total lent to customers rose from £3.3bn to £4.8bn, with the majority (70.5%) coming from mortgages
  • Starling customers spent £16.5bn using their cards, up from £11.9bn (up 39%)

It’s a hugely impressive set of results that’ll silence a lot of the industry that were saying just a few years ago that a business like Starling could never be truly profitable in this environment. In many ways, it can be argued that Starling is ‘leading’ the challenger bank pack.

But the annual report wasn’t Starling’s only piece of news from last week, indeed it was somewhat overshadowed by the announcement of CEO Anne Boden’s departure. There’s no denying Anne has done an absolutely brilliant job at the helm of Starling and will be sorely missed. The foundations she’s laid have set the bank up for continued success and, in my opinion, she’ll go down as one of the great fintech CEOs of our time. She’s certainly leaving on a high.

Next to Monzo.

TLDR: Rising revenue and growth investment taking precedence over profitability

Here are the headlines:

  • Revenue rose from £154m to £355m (up 131%)
  • Losses decreased slightly from £119m to £116m (down 2%)
  • Revenue increase largely driven by investment income spiking from £38m to £168m (up 342%) and interchange fees increasing from £79m to £127m (up 61%)
  • Customer deposits rose from £4.4bn to £6bn (up 36%)
  • Card spend increased to £33.6bn from £24.4bn (up 38%)

In the detail of its report, Monzo also increased its provisions for potential loan losses after a move into the Buy Now Pay Later industry through its Flex product. It’s set aside £101.2m to cover bad loans this year, up from only £14m last year.

While Monzo hasn’t quite seen the same levels of growth as Starling this year, make no mistake, this is still a very encouraging set of results. Indeed, it even noted that it was profitable in the first two months of 2023. On that point, one interesting quote from CEO TS Anil was given to CNBC “Profitability was always a choice as we balance continuing to invest in growth with profitability. We could have chosen to be profitable a few quarters ago.” At a time when many fintechs are primarily focused on profitability over some of the aggressive growth we saw in previous years, this is a refreshing change of pace.

While these are two sets of strong financial results, there are, as always some caveats and considerations. Two big ones are that:

  • Like many, Starling and Monzo have been buoyed by rising interest rates in the UK. As rates fall, margins will likely get squeezed.
  • The figures in these annual reports are still absolutely miles off the level and scale of what we continue to see from the more traditional high street banks, no surprises there. Taking customer deposits for example, Starling’s £10.6bn and Monzo’s £6bn may sound impressive on paper, but pale in comparison to when compared to, for example, Lloyds’ £512bn.

Despite those caveats I think these two sets of results give the British fintech sector something to cheer about. Two profitable, or near profitable, unicorns that are continuing to go from strength to strength amidst a difficult macro-economic climate. These success stories give a lot of hope to the thousands of fintech businesses in the UK that are looking for similar scale in the coming years. It’s a sign that Britain’s fintech landscape and ecosystem is maturing, and that new businesses can succeed in sectors that have remained unchanged for decades.

A while ago I wrote about VC powder building up in the tech ecosystem. This is something that’s still the case, but the signs are there that money is starting to loosen a little, and you can bet your bottom dollar that the fintech sector will be one of the big beneficiaries when it does. Indeed, that aligns with something that we’re seeing here at MHP from clients, there’s funding out there for fintech businesses as the power players like Monzo and Starling lead from the front and show investors that profits are possible.

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