For companies that have created their own platform it’s the former that delivers the brand visibility. But it’s the latter that offers the potential to build real, long term value. The latest example of this phenomenon appears to be UK neo/challenger bank, Starling Bank.
Starling Bank is reported as stating it hopes to make SaaS technology “increasingly significant” to its business model as it ramps-up international expansion ahead of a hinted-at IPO. The clue here is that the digital neo/challenger bank’s more than four million UK customer accounts run on a software platform called Engine, which formally became a subsidiary of Starling in February 2022.
Whilst Starling runs its own challenger banking business, Engine licences its platform – which it claims to have scaled over 20m in its test environment accounts – to other banks.
Last month, it announced inaugural deals with Salt Bank in Romania and AMP in Australia.This approach lets Starling reap the money-making benefits of foreign markets while bypassing the costly, risky and time-consuming process of obtaining new banking licences as well as the long haul of building a trusted brand of its own in each country.
But there are already competitors to Engine. Cloud banking fintech Thought Machine, for instance, has closed deals with the likes of Lloyds, JPMorgan, Morgan Stanley, Standard Chartered’s Mox and Starling Bank competitor Atom Bank.
The existence of such competition validates the market for new systems per se but against Thought Machines Starling Bank is unique in proving and using itself the tech it would sell to others. That’s not just `better` it’s `different`.
So, Engine remains a very smart move, we think. Particularly because changing its business model gives Starling Bank a real shot at becoming a Category leader and the value generation that comes with it. So could Starling Bank’s long-term value creation strategy really be mainly focused on the Engine business, rather than the bank itself?
This approach has precedence. Starling Bank appears to be `doing a Ocado` where the UK-based online supermarket increasingly looks like it’s a demonstrator for its Ocado Smart Platform (OSP) and its en vogue – and highly valued – combination of artificial intelligence, robotics and automation.
Ocado Group’s already listed on the LSE but it’s telling that, whilst its FTSE classification is `Consumer Staples`, the banner on LSE’s Ocado webpage features pictures of its demonstrator warehouse rather than a consumer-friendly Ocado delivery van and a smiling customer.
Starling’s move makes a lot of sense to us. Even if neo or challenger banks were a Category – which we’ve said before we don’t think they are not – Starling’s chance of becoming a Category leader would be slim.
It continues to fight for domestic market share most notably with Revolut and Monzo and a bunch of look-alikes as well as subsidiaries of bigger lenders capitalising on demand for digital banking.
But as a financial services enabling technology of choice Starling has a shot. We’ve got a lot of time for Starling, not least because they drove to profitability early. Now they are hinting at an IPO. And Engine could be the Category value-creating (ahem) engine for this
What does this tell us? The old adage is that it’s the makers of the picks & shovels i.e. the enabling infrastructure that make money in gold rush (Cisco in Networking, Microsoft Azure in ecommerce etc).
Success in Category Design can come from offshoots of products or services that were, at best, `better` than their competitors. Slack was a videogame chat app, Minecraft evolved from Cave Game by adding survival to building skills, AWS grew out of Amazon’s infrastructure expertise necessary to deliver a global shopping site.
So your eventual Category success may not come from your first shot and your first PoV. Hence the requirement to map your progress against your Category Blueprint reframing your customer problem or even reframing your customer or their segment in the search of the value from ‘different` (For how not to do this see our recent blog on Zoom.)
So Ocado’s customer moved from the supermarket consumer to retail infrastructure specialists in the same way that Starling’s focus looks like it will move from retail banking services consumers to retail banking infrastructure specialists. In both cases moving from a B2C to B2B proposition with changing buying personas.
In both cases, they have produced powerful demonstrators of their tech capability. It is the infrastructure that delivered the `different` whereas their demonstrator can only be, at best, better than a group of online supermarket or neobank peers.
Starling, like Ocado, seems to have realised this, packaging up their learnings from real-time neobanking world to deliver a Challenger Banking Platform using artificial intelligence and automation creating value for B2B customers in a way that is fundamentally different to existing banking systems.
And that, we hope, bodes well for a future IPO. Good luck Starling Bank!
Find more discussion on Starling’s Category pivot and many other contentious Category issues on The Difference Engine podcast at https://link.chtbl.com/thedifferenceengine