Digital-only lender Starling Bank Ltd. is launching a white-label service that will allow other banks and financial technology companies to build products, including current accounts and debit cards, using their cloud-based infrastructure. Industry insiders say the launch is a sign that the "banking-as-a-service" model is coming of age.
Clients of Starling's new platform would be able to pick and choose product features or components that they wish to use, and would not have to be regulated individually as they would be covered by Starling's banking license. Clients would also have access to all of the major U.K. and European payment schemes via Starling's application programming interfaces. These include Faster Payments, BACS and the Single Euro Payments Area.
Starling's service will allow banks, fintechs and even government departments to develop and scale new products "quickly and efficiently without the need for long development lead-times and complex legal arrangements" that might be involved if they developed their own infrastructure, an Oct. 10 statement said.
Simultaneously, Starling announced that it was working with payments companies InstaReM PTE limited, Vitesse PSP Ltd., payments software provider AccessPay Pty. Ltd. and Incuto, a banking technology platform for credit unions.
"The banking transformation has begun; we're enabling customers to pick and choose the applications and services they need and how they use them," Starling CEO Anne Boden said during a speech at the PayExpo conference in London on Oct. 10.
Starling has not yet discussed how much income it envisages making from the white-label business relative to its "core" banking activities, COO Julian Sawyer said in an email.
Starling's decision to launch a white-label banking product is "bang on" given that most of the U.K.'s incumbent banks are struggling with old and outdated tech infrastructure, according to Louise Beaumont, co-chair of the Open Banking and Payments Group at industry body techUK.
Infrastructure 'stuffed'
"[Starling] have clearly worked out that big banks' infrastructure is stuffed. Absolutely stuffed. We can all see that incumbent banks such as HSBC Holdings PLC are spending heavily on tech, but in reality this is just to keep the lights on. There is a huge market for providing a set of rails," Beaumont said in an interview.
The Sunday Times reported in August that Starling had signed a contract with Royal Bank of Scotland Group PLC to provide payment services.
Starling is not the only U.K. company to provide banking infrastructure to third parties: Railsbank Technologies Ltd., founded in 2016 by serial entrepreneur Nigel Verdon, who has also founded payments firms Currency Cloud and FX Capital Group, provides "rails" for companies to deliver banking services. Railsbank does not provide any retail or wholesale banking services of its own, just the infrastructure for other banks and fintechs to use.
"The banking as a service model is where we believe the whole industry is going globally," Verdon told S&P Global Market Intelligence in an email.
Railsbank uses a similar model to Silicon Valley firm Twilio Inc., which provides application programming interfaces to third parties in the telecom industry, making voice calling, messaging and video calls possible, Verdon said, meaning that telecom companies can skip building their own infrastructure.
While white-label banking services may be on the cusp of taking off, Starling could be at risk of cannibalizing its original banking business with its new platform offering for other companies.
"A major issue for Starling is they are massively conflicted as they go after the same customer base as their banking-as-a-platform customers," Verdon said.
But Sawyer said there was enough difference between the banking services provided by Starling, and the products and services that would be provided by the companies using its infrastructure.
"Our clients within payment services offer a wide range of propositions so the innovation and product market fit offers different end-user solutions — therefore it's less about cannibalism and more about supporting the wider ecosystem (and of course bringing additional revenue to re-invest)."
Starling, which was founded in 2014, has yet to make a profit. The bank recorded a pretax loss of £11.6 million in the year to Nov. 30, 2017, compared with a £4.4 million loss the previous year. The bank incurred operating overheads of £16.7 million in the year to Nov. 30, 2017, some of which was directly linked to the cost of building and implementing new software to support its banking platform, according to the most recent annual report. This compares with overheads of £8.4 million the previous year.