Fireside Chat: Interview with Raman Bhatia, Group CEO, Starling Bank

A candid conversation about the modern leadership opportunities and challenges of steering a high-profile neobank into its next chapter.


Transcription:

Hugh Son (00:11):

All right folks, let's dive right into it. For those who aren't aware of Starling Bank, they're not aware of the UK FinTech landscape. If you could set the table there, what's the origin story? How did you guys find product market fit in the UK?

Raman Bhatia (00:27):

Well, first of all, thank you for having me. It's a pleasure to be here. So Starling Bank is, we call ourselves Starling Group. Now we are 10 years old and we emerged on the scene in the UK with very forward-looking progressive in many ways, authorization regime, which are regulator. The PRA embarked on this was authorization of challenger banks to really shake up the incumbency in the UK. So 10 years old. Stalin Group now is a marquee digital bank in the UK. Four and a half million customers, 10% market share of SMEs where we've really built a very strong franchise and the tech platform, which helped launch Starling, it's called Engine by Starling, which is now set up as a separate business, which we are using to export our proprietary tech globally and including the US And I'm sure we'll speak about that shortly.

Hugh Son (01:29):

We'll get into that. So we're helped by the headlines here. Just last week you guys reported earnings, they were down 25% I believe, on two items, regulatory items. So one was as a former tabloid guy, I mean I always clue on in these little quotes. And the quote here was Shockingly lax controls. It's a tough headline. That was one. And the other one was something about the pandemic air loans, the bounce back loans. Right. And so together that was a combined hit for you guys. What were the lessons there?

Raman Bhatia (02:02):

Sure. So first of all, the earnings. So we have fourth year running profitable and almost 300 million run rate to profits, which makes us one of the most profitable digital banks anywhere. But we are not chasing, we are not on this quest for greater profitability. The business is still investing for growth, which was there in our results. But I'll speak about those two matters, which are historical issues, legacy issues. The one which you alluded to,

Hugh Son (02:35):

Where they predate your arrival on the scene one should point out.

Raman Bhatia (02:39):

Yes. Well, I joined 11 months ago, but I think the FCFI was a very big learning movement for us. And this was a fine around financial crime controls. Again, it was a culmination of a three year sort of remediation exercise, which the bank has embarked on and we are in the final stages of fixing those gaps, enhancing the controls. So that's an old story, but it culminated in the enforcement action, which by the way entailed a full review of digital banks across the board in the UK and deficiencies across the board, which banks have now fixed. But that has also happened to incumbent banks over the last 10, 15 years. The other matter which you alluded to is around COVID era, our 2020 loans, which all banks were asked to step up to support businesses all over the UK and Starling, despite being a very young bank at that point, stepped up to support businesses. The provision we took around bounce back loans is a tiny fraction of the overall lending the bank did. It is about 1.4%. The headlines not withstanding this was self-declared issue in an isolated case, which we then reported and took a provision.

Hugh Son (04:02):

So you mentioned the vanishingly small percentage loans of the overall book. So it's not as though this were, because at first blush I look at that and I say, okay, there's a tension between growth and between controls. Startups are rewarded for growth. Obviously there's, so you have all these errors pointing towards go, go, go. And as a result, some things get through. Is that a way to look at it or is it just that there was a needed apparatus that had to be fine tuned to be able to satisfy the regulators?

Raman Bhatia (04:37):

Yeah, well I think staling never pursued growth at all costs. That said, with exponential growth, it was clear that the control environment did not keep pace with the growth. And that has now been well and truly rectified in the last two and a half years. The bank has spent millions in enhancing our control environment, whether it's hiring more people on four I checks or strengthening our control systems. So that's two years in the running, but it was never at the expense, was never proactively choosing to not announce controls. It was never proactively growing at all costs, but things were not fixed at the right time and hence the fine.

Hugh Son (05:24):

Let's broaden out a little bit, what is it about the UK for those who don't know, there's a sense that, okay, there's Monzo, Revolut, you guys, okay, they're name brand folks for people who cover the space, chase is now also part of that cohort, right? They've got their FinTech asset light bank in the UK. They seem to be happy about that. They're talking about Germany as well. So it's part of their non-US retail strategy. What is it about the UK that makes it this sort of environment? There's a cradle of innovation a little bit there.

Raman Bhatia (06:05):

Sure. I think a few factors and London is well and truly a FinTech hub for the world. So the first thing is the regulatory regime has been way forward looking and encouraged authorization on new banks. Open banking is not bank led. It's actually regulator led real-time payment systems. The infrastructure is more modern. Consumer trends are largely very similar, whether it's the US or the UK. People expect their banks to compete with their native digital experience across the board. But in the UK, with all the regulatory context, there has been a real march towards innovation. The payment rails, realtime payments for instance, still in its infancy in the us not quite the reality at scale has been there in the UK for a while now. So all of that has led to fierce competition. There's also a competition regulator called the CMA, which tried to shake up the incumbency of large banks when it comes to current accounts, checking accounts and all that fostered in creation of a very vibrant ecosystem.

Hugh Son (07:15):

Yeah, I mean it would appear to me, I'm sort of a generalist on this, but it would appear to me that the competitive edge of the newer players, the delta between the new and the incumbency is shrinking a little bit as they improve their offerings on the digital side. Is that fair? And does that mean that the days of heady growth are more in the rear view mirror?

Raman Bhatia (07:44):

No, I don't see it that way. Staling bank, six years running, which is a consumer magazine recommended bank, the only one, we have the highest NPS in the sector, not a very surface level. And it should resonate with people here. Bank apps seem to be converging around functionality and features. But having done digital transformation for one of the behemoths, HSBC, I know underneath that simplicity on the app, there is so much complexity and banks have done all sorts of system APIs to create some sort of app which can compete with our native experience. But underneath that, the complexity is still going back to 40, 50 years. I mean the US banks there is still mainframe code, which is older than the moon landing. And by all accounts, every single bank in the US is 20 years behind. And the UK incumbent banks, they have broken data models, 4,000 fulfillment systems and we are cloud native and we've got one single customer view with a very clean data model. Which means as we embark on, I guess the next chapter, call it AI-based personalization, we have native advantages. We don't do POCs, we are actually deploying all of the new tech at scale, while large banks, seemingly their apps are converging, but underneath that there is still complexity going back to 30, 40 years.

Hugh Son (09:13):

Yeah, that's helpful. Thank you for saying that. So engine, okay, this is going to be the engine of growth, I think. Talk a bit about that. Is it resonating in the market and what is it?

Raman Bhatia (09:28):

Yes, sure. Well engine, the secret sauce for styling is the proprietary tech we have built an engine is that it is not just the core ledger transactional banking, lending cards, it's also the data model orchestration above that, it's also the customer service modules sitting right on the front end. It's also all the APIs you need to integrate with any technology choices bank may have. We are selling it as a managed service SaaS model. The product market fit here has been quite remarkable. We are still in very early stages, but we've launched a digital bank in Romania, it's called Salt Bank, and it exceeded all its expectations. First of all, it's been the fastest launch of a greenfield digital bank and the records are never kept. But if records were kept, it would be less than 12 months and another 12 months more than half a million customers in Romania. We are live with AMP bank in Australia, which is more than one 50 years old Heritage Bank. We are scaling there. US is a huge market for us. We have incorporated in Delaware and we are setting up an office there, 4,000 banks, tech obsolescence. That's why your hair, the story an engine as a managed service solution is tailor-made to reduce tech costs. So in some cases 70% reduction, but also in creating fast rapid innovation at scale.

Hugh Son (11:03):

So in terms of scaling this, right, you're talking about Romania, talking about Australia talking to the US, how much do you have to actually customize for that particular region's regulatory fill in the blank, right? And so how scalable it really is this product?

Raman Bhatia (11:19):

So first things first, we are selling it as a managed service with minimal customization. This is not going to be every single bank gets a bespoke solution. The platform has being architected so that customization is minimal. We call localization versus customization. So for instance, in Europe with salt bank, multicurrency orchestration, all of that we managed to localize in a matter of weeks. The same applies to other target markets where we are finding amazing product market fit in discoveries, whether it's Middle East, north America as a whole, where we are on the cusp of announcing some big prospects and then really setting up an operation head. By and large, what we have built is universal in nature can be localized with minimal adaptation. And if a bank has made choices around particular vendors, because the platform is natively extensible, we can integrate very easily with any choices a bank may have made. For instance, on CRM, we can integrate with any CRM provider, although we would say that the services we have built, you don't need to spend millions on an expensive bells and whistles CRM vendor.

Hugh Son (12:38):

Okay. K Crack in the US obviously has got to be a huge part of the plan. There may be people in the audience who come from companies where they, you're going to compete with them. Jack Henry is the FISS of the world. Why do you think your offering is going to be preferentially chosen over the existing ecosystem of folks who are here to do exactly that to help banks get digital?

Raman Bhatia (13:05):

Yeah, look, in our case we have battle hardened demonstrable use case of world-class net promoter score installing bank. It's a demonstration of engine at scale in the most regulated sector or jurisdiction in the market. And that's a unique case study of a lived experience of engine. Second, I think the way we've architected the platform cloud native, scalable, resilient by design has had zero outages from inception in the last 10 years in a regime where that gets obsessively measured and monitored by the regulator. And then I think the architecture design of engine versus some of the incumbents makes it very unique. The cost, the time to deploy much faster and it's continually updated, not just from staling, bankrupt all the clients collectively and all of that would make it a very unique proposition for domestic banks in the US and beyond.

Hugh Son (14:11):

Now, I mean I'm often guilty of recency bias, but okay, the recent headline, so I'm a client, how can I be confident that I'm not going to have the same regulatory issues? Essentially you're exporting the tech stack, you've had these issues with loans with FCA, what's the conversation there?

Raman Bhatia (14:33):

Those issues are completely decoupled from the tech that we are taking to market, right? So the COVID loans one has absolutely no connection to tech whatsoever. And on the FCA fine front, the sanction screening configuration, which is the only technical part if anything, when we do the engine demonstration to prospects, the modules which resonate immediately are to do with onboarding KYC because the amount of rigor that's gone into our platform on the back of that scrutiny going three years makes it actually unparalleled. And that's what clients love. So in fact, turning that on its head has become a unique selling proposition for engine.

Hugh Son (15:18):

So just in prep for our conversation today, I mean if you believe some of the clips out there, engine is a bit of a bet the firm kind of wager, in other words, of the three name brand, challenger banks, others have a bit more scale, they have a different approach. Obviously Revolut is attacking or hopes to gain a foothold in the US with a charter. I don't know where that is, but they have different strategies. And I guess the question is, is it fair to think of this as a bet the firm wager that a lot really depends upon this, not in an existential sense, but in a growth story sense.

Raman Bhatia (16:05):

Well, I think we have a multifaceted group strategy. We are still in the foothills of the opportunity in the UK where we are only getting started. Yes, we have a nine 10% market share in SMEs, but on retail we have a massive road ahead. And the underlying economics of the UK bank are absolutely careless compared to anywhere in the UK or beyond in a business which is producing consistently ROE extra 30% and it's an outlier versus others. So there's a lot to go after there. We launched an easy Saver product in November last year with no marketing. We are now sitting on 1.5 billion balances in a matter of four or five months, which is a proof point of the opportunity in the UK. Now engine then takes our tech and exposes us globally, but we are also open-minded around a combination of our balance sheet led model with engine in certain geographies and us might be one where we may explore that very model taking engine to launch Greenfield Bank for instance, where all of that I have the permission to explore that with our board and investors. So lots of growth vectors for the firm and engine is one of them. Yeah,

Hugh Son (17:20):

I mean let's pivot a little bit to tech. Okay, so AI has got to be one of the most exciting things we've seen in a while. Where are you guys with that? And just you think of Klarna and their founder talking about the radical efficiencies that are capable of that. I mean, how much of that do you co-sign or how much do you think is aggressive?

Raman Bhatia (17:49):

So I think that particular case there has also been talk back into high empathy human advisors and I'll give you a perspective on ai, but I do want to call out what's unique about staling. Paradoxically for a digital bank, we have almost over invested in 24 7 human service in the UK. We are the only bank doing that at scale. We have 15 seconds wait time. All our customer service teams are in the UK on payroll. Even the 98% of interactions are digital. But the fact that in that 2% moment where something doesn't work, we are invested in that experience. Now AI, I think there is a fair bit of hype, but the age old adage around, I think it was a matter who said that overestimation in the short run but underestimation of the impact in medium term. And that's exactly how I see it.

(18:49):

We are absolutely investing invested in AI at scale. We are not doing any POCs because we have last mile workflow integration which large banks will never have. So when we deploy AI, it is with an eye to scale. Now examples of that GenAI is live in our contact center at scale with Asian pilots where every single call gets summarized by AI. We are also using AI to prompt our customer care advisors on potential indicators of vulnerability from a customer when they're calling on the fly. We are deploying AI on processing of fraud, which is a huge theme in the UK. Authorized push payment fraud is a real challenge for all banks and a regulatory regime where banks are held liable. We have deployed AI models to reduce prevent fraud by 30% there, but we are not stopping there. We are on the cusp of actually putting generative AI in the hands of our customers with something called spending insights.

(19:56):

It's in testing now, but I'm very bullish on deploying that at scale. Now the challenge we are finding is the compute power across the board, if you were to give it to four and a half million customers on the fly, there is a real challenge infrastructurally. So we are working through that. But that would be a game changing experience where you can actually ask questions about how much should I spend on holidays? And it'll give you, because our categorization is 95% accurate an answer, which then you can interact with an improved resolution of that answer progressively.

Hugh Son (20:30):

What model are you thinking of using?

Raman Bhatia (20:32):

So we are doing Gemini multimodal model and we are using something called retrieval augmentation methodology, which is native predictive power of large language models is very high, but we are training those on our own knowledge management, which then makes it even higher. And that's going really well and we are approaching this with the right level of rigor and caution and ethics. My CIO is Bank of England's task force co-chair on AI application across the board in financial services and we are absolutely mindful of doing this the right way.

Hugh Son (21:18):

So if I recall correctly, the 98% in the 2% that's human served, do you see a world in which that gets down to zero or close to zero?

Raman Bhatia (21:32):

Yes, but at the same time there are vulnerable customers. Yes, digital penetration is across the board very high in the UK and indeed in the US but there are customers where they do want the human touch and we are committed to maintaining that for precisely that reason.

Hugh Son (21:54):

Yeah, so recent story in the journal, you've probably seen it talking about stable coins. Obviously the regulatory regime in this country is completely night and day different from a year ago. And so I think the thinking out there is they were going to go to EWS, kind of the Zelle playbook, banks get together, decide that they see a competitive threat and so that they're going to, or at least in the very early stages of thinking about how do they do their own version as sort of defensive posture. What's your take on this both for yourself but also for the bigger world and why is this better? I mean can you explain that?

Raman Bhatia (22:37):

Yeah, well I mean I think broader distributed ledger tech, we can have a discussion on that. But when it comes to starling's position on crypto most broadly and the UK position which we mirrored, we are not enabling that on the consumer end we'll come to stablecoin. But on the consumer end we have, unlike some of our peers, we have shied away from enabling that

Hugh Son (23:04):

Because it's you in the Jamie Diamond camp of this is,

Raman Bhatia (23:08):

For us the crypto assets. Banks are not allowed to offer that to retail customers. Even though I'm fully supportive of retail investing broadly, it needs to be strengthened and widened in the UK but we are not offering crypto assets on Staling app. Now stablecoin of course, some of the announcements by a few players are quite mouth watery and scope, but the real threat would be to correspondent banking and transactional costs related to correspondent banking. We are watching that. It doesn't really impact our business model, but the scope of that is truly staggering and I think that the impact as you are posing will be about transactional cost and experience around making it very real time. And let's see how that develops, whether that gets co-opted or has its own business model, but the end use case around correspondent banking, I can see that being challenged.

Hugh Son (24:14):

Yeah, interesting. And by the way guys, we should prepare for in another five minutes a q and a from the audience. If you have questions, there's going to be somebody walking through with a microphone I believe, if we can handle that. So get ready. But look, this is an interesting time to be a FinTech startup. We had the go-go days of 2021, we're still in the hangover in many ways. There's a lot of, I dunno what the phrase is, zombie corns or something like that, digital banks that just never took off, but they're also not quite dead yet. And then there obviously there's the chimes of the world too. Looking at listing for yourself personally, can you give us a marked market in terms of an update of where you are, both with the valuation, both the thinking about listing and the thinking about where in the world to list?

Raman Bhatia (25:19):

Yeah, sure. So I think the business is in a very fortunate place to not really need primary capital. In fact, in the results which were published, the part which has gotten less coverage in the UK is that the business sitting on excess capital in the tune of half a billion, more than 400 million, which we want to deploy and grow. We are a fully authorized bank, which makes a slightly different from many of the US digital banks who as I understand, sit on someone else's license. We are a fully regulated authorized licensed bank, which means many of our regulatory reporting bars are almost out of A PLC. So it's fairly logical to consider a listing for the business down the road. We have discussed that, but we have no firm plans around the timing or destination of that listing at the moment.

Hugh Son (26:23):

Just to sort of game it out though, UK, New York, somewhere else, I mean what are the pros and cons?

Raman Bhatia (26:32):

Yeah, there are pros and cons. Look, obviously we are a UK bank with a very strong UK customer base, which points to the direction of UK. The de equitization of UK capital markets is a well-known story. Although the recent reforms by the FCA, the listings reform are absolutely a step in the right direction. We are all gunning for UK capital market success, but at the same time the US is perhaps the deepest pool of capital that exists. And given that we have a technology business in our group, there is logic around valuation outcomes can be more healthy, more robust depending on how we define our group perimeter in the us. So all of these are very obvious pros and cons which are in our decision set. But as I said, no firm plans agreed at the moment.

Hugh Son (27:33):

Yeah, and what's the thinking between, does do you guys merit a banking valuation, you guys merit a tech valuation? I mean you mentioned obviously the tech aspect of listing in the states, I mean would be nice.

Raman Bhatia (27:48):

Yeah, look, I firmly believe our fundamental economics are that of a tech company, a business being run on a tech platform, which makes us very unique. The cost to serve, cost to acquire economics are remarkably different from our incumbent payers in the UK. Now of course the multiples for banks in the US are higher, but if I just stick to the UK then absolutely I consider our valuation methodology and multiples to be very different from the book value led valuations for incumbent banks. And now the US is a different story where the banks trade at a higher multiple. So we are evaluating all of these options and at the right time we'll make a decision.

Hugh Son (28:40):

And no sense if that's a three year, two year, one year kind of outlook.

Raman Bhatia (28:44):

I think it would be premature to comment on a firm timeline at this stage. Sure.

Hugh Son (28:52):

I think my last question for you then is, okay, looking at, we've hit obviously sort of the hot button topics, gen ai, stable coins, your valuation listing. I'm thinking what have I missed here? I mean what do you think is, here's an audience everybody wants to hear and get smart by being in your presence. What could be an underappreciated FinTech trend that you would bet on for the next few years? That's actually going to be the next thing that everybody talks about down the line.

Raman Bhatia (29:26):

I think, look, we can talk about digitization or banking or embedded finance sort of business models. And by the way, I have nothing against those that I do think they have legs. But if you go back to first principles we've all been discussing, particularly people who work in digital banking have been discussing this idea of personalization for a long time category of one holy grail. And I've used the language of making banking personal, salient, contextual and relevant for the last almost 10 years. But I think now we are at a point where that could well and truly be a reality and not from a very traditional product led marketing basis where your here is another offer to you next best action. All of that is actually old school. It's really well and truly turning banking into a very personal experience where you are in your own swim lane when you are in an app because the tech is there, the data models are there and if you have the platform to do it. And that's what we are trying to do on Starling is to really go in that direction. Forget selling more products and the world of regulated products, how do we create that engagement with customers where it becomes if they choose effortless, if they want to engage, then truly personalized, engaging experience. We have only scratched the surface of that and I think that is very exciting for me to consider.

Hugh Son (31:01):

Well Raman, I look forward to that future. I think we can open it up to the floor. We're at five minutes guys, is there anybody with a question here? Okay. And do we have a microphone person? Okay, great.

Audience Member 1 (31:14):

What do you think are some of the biggest obstacles for Starling to meaningfully compete with some of the incumbent core providers, FIS, Fiserv and Jack Henry. And if you had to think about what your time horizon is for actually coming in and having an opportunity to displace them as the core system of traditional banks, what would you say that would be?

Raman Bhatia (31:37):

Yeah, let me take the second part first. The time horizon is now, I mean we are incorporated in Delaware. We are setting up an office imminently. We'll be looking for partners in the US system integrators, consultants who are speaking to banks. So please do reach out. Recruiting is underway, so we are going full steam ahead in setting up our operations. We are also in the broader market set, having some conversations, early ones and the obstacles of course it's all about execution excellence. There are with due respect to people who are representing those companies. I mean when it in effect is a oligopoly 70% market share, then the locking of clients into purative sort of contracts can create walled gardens and barriers to entry for new players like us. But we come with a very different approach as not a pure player but part of a banking group. We have a more flexible revenue model and our tech is superior is what I would say. We have a proven model of deploying our tech in a matter of under 12 months and launching a bank very quickly thereafter, fully cloud native and sold as a matter of service. And that's what we'll bring to the market.

Audience Member 2 (33:11):

We've covered a lot about digital transformation, all the good things about what a bank needs to do. I would like to understand a little bit about your leadership challenge given you're playing in the global market serving different types of clients and you or customer segments and you recently took over from Anne. So can you share a little bit about from where you sit, your uniquely positioned as a global bank, what are the leadership challenges?

Raman Bhatia (33:37):

Great question. And I've been in the bank for 11 months now and 25 30% of my time has been spent on really assembling a world-class team, which is now in place. And it's a combination of our native tech credentials from staling blended with banking expertise, people who have worked in banks all over the world, 25, 30 years of experience. And I firmly believe that sets us apart, the combination of that and that would be the way we approach the foreign to hair in the us. But you're right, I mean that's what it takes. It's building that team, but we have a unique combination of talents.

Hugh Son (34:26):

So it looks like we have time for a final question guys. Who's the lucky person,

Audience Member (34:33):

Sir? Thank you. Alright, so you have big initiatives up ahead, which are great. I like that a lot. And I know a lot of people know that people are key to rolling out those initiatives and with the recent mandates that Starling Bank, how do you plan to get your team motivated and engaged with that common goal you have? And for banks who haven't prepared for that yet, how can you help us get there with your input?

Raman Bhatia (35:02):

Thank you. Related question to the last one, but I think at the heart of your question, if I could tease out, it speaks to the culture of the bank and I think I'm in a very unique privileged position when I've spent the first 90 days going out meeting our teams. One thing sets staling apart, people have joined staling because of a mission. The mission centricity, the selection bias around that is unique. The founder's origin story of really shaking out the banking sector and creating an experience which stands apart, rings true today. And my job as the CEO is to preserve that zeal and create an employee proposition where people come to work with that mission in mind and it's a very enriching experience for them. Complimenting that with the investment in people. Now for tech businesses, digital businesses, I mean this paradox is universally true. They are actually firmly and squarely about people and not about tech even more so than other businesses. And that's front and center of our agenda. I mean, I'll give you one more unique strand about staling. We are also uniquely committed to creating more women in coding and women in tech. We are an outlier in the UK where 30 40% of our tech intake and we are hiring thousands of people over the next few years.

(36:32):

Women engineers who are joining Staling.

Hugh Son (36:35):

Yeah. Well folks, we're at time, so really appreciate your attendance here. Thank you so much for that. And round of applause here for Raman, please,

Raman Bhatia (36:43):

Thank you.