While digital banks like Monzo, Revolut, and N26 have taken steps to cut staff amid the Covid-19 crisis, Starling continues to on-board new hires remotely. Such stark differences in action and outlook point to a number of factors that are driving strategy at digital banks beyond the officially stated reasons.
Last week, digital bank Monzo announced plans to axe up to 120 jobs in the UK, having already closed offices in Las Vegas and cut 165 roles as the economic consequences of Covid-19 were fully realised. This followed action taken by Revolut in May that saw the dismissal of approximately 60 employees as part of “cost-saving” strategies due to coronavirus, as well as N26 cutting its New York headcount by 10% and contracting staff in Berlin and Barcelona on a reduced-hours basis.
Contrastingly, the last six months have seen the likes of Starling “fire on all cylinders” and thrive despite the effects of Covid-19 on global growth, launching an array of new products and managing to onboard new hires remotely while avoiding the need to furlough staff.
The business model underpinning the lean marketplace-based digital banking strategy employed by most neobanks is based on interchange income and product commissions. As such, it is heavily reliant on customers using the provider’s platform to pay or transfer as regularly as possible. Naturally, with lockdown measures in effect across the developed world and with most businesses closed, the frequency of transactions has substantially fallen as reduced activity combined with greater consumer uncertainty has led to less spending. Consequently, the aforementioned redundancies could be attributed to the global economic slowdown caused by coronavirus.
The success of Starling during this period highlights the importance of diversified revenue streams. Unlike the many marketplace-based lenders whose models are focused on interchange income, Starling has been able to generate income via the traditional net interest method – the difference between interest paid on deposits and charged on loans – due to it being a fully licenced bank that can accept deposits.
Similarly, having been an SME lender since 2018 with a longer track record in this area than Monzo and others, Starling has been more prepared, which has allowed it to adapt more successfully during this period.
While Starling has followed the industry standard of freezing interest rates and offering deferments to customers who are struggling during this period, it has also cut the interest rate offered on personal current accounts to 0.05%, allowing it to remain profitable as margins across the sector are being eroded.
Furthermore, Starling has been one of the few neobanks to venture into Banking as a Service, whereby it has offered its bespoke proprietary platform to other technology platforms looking to launch into the banking sector or offer complementary services. This provides greater potential for growth by targeting different segments of the market such as those interested in wealth, investing, and savings platforms.
Despite Covid-19 providing a simple explanation for the poor performance and staff cuts from Monzo, Revolut, and N26, it does not explain all the decisions made. While Monzo has been severely disrupted by Covid-19 and has had to make use of the government’s furlough scheme for approximately 300 employees, valuations falling 40% from £2bn to £1.25bn suggest underlying problems with its pure customer number strategy.
Similarly, Covid-19 does not explain the decisions taken by Revolut, which was described as “cash rich” by CEO Nikolay Storonsky, who also announced plans to spend some of the half-billion dollars raised to pursue acquisitions, hardly the actions of a firm forced to make redundancies. As such, it is evident that broader strategic considerations are driving decision making, many of which are not wholly attributable to Covid-19.
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