Earlier this month, we noticed that several popular American fintech companies were seeing rapid revenue growth thanks to high interest rates. Basically, interest-driven revenue was helping offset declines in consumer trading activity at Coinbase and Robinhood as people pulled back from active trading when the economy soured.
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Part of that economic spoiling was caused by interest rates rising around the world, but with countries taking a more measured approach to interest rate hikes, you could argue that we’re nearing the current economic cycle’s peak rate environment. Regardless, this increase in interest rates has created a massive growth opportunity for fintechs, both public and private.
Enter Starling, a U.K.-based neobank that has raised $1.1 billion to-date, per Crunchbase. The company’s in the news today due to its long-time CEO and founder Anne Boden stepping down. As TechCrunch’s own Ingrid Lunden pointed out in her piece, if “there is an underlying story behind the timing of the departure, it’s not completely clear what it is.”
But I have a hypothesis. Reading the company’s latest annual report, it’s clear that the neobank is on improving financial footing. For a long-time founder, getting their company to the point of clear success is a reasonable time to take a break. That’s my guess.
What is driving Starling’s strong results? There are several contributing factors, but chief among them is — you guessed it — rising interest-based income. Let’s peek at the numbers this morning to see if we can expect other neobanks to enjoy similar gains.
Starling takes flight
In the financial year ended March 31, Starling reported total income of £414.8 million on revenue of £452.8 million. If you’re wondering as to the accuracy of those numbers, rest assured they’re correct. Total income at Starling is the sum of net interest income, net fees and commissions, and other income. Net revenue, meanwhile, is the combination of net interest income, fees and commissions, and other income.
In short, revenue doesn’t discount fees and commissions expenses, which totaled £38 million in the year.
Regardless, Starling’s total income increased 120.6% in the period, while revenue rose 109.2% from a year earlier. That’s impressive. That growth also helped it expand its profit before tax to £194.6 million from £32.1 million last year and boost its profit after tax to £142.9 million from £44.9 million.
So, what drove the company’s massive revenue gains that allowed it to grow its profitability at a simply amazing clip? Observe:
Look at that massive gain in net interest income!
How did that come to be? The company expanded its interest-bearing asset base and managed to derive a greater net interest margin:
Data visualization by Miranda Halpern, created with Flourish
That’s an improvement of nearly 150 basis points in a single year.
Now, the gain in net interest margin was not the only factor driving its net interest income: Average interest-earning assets increased to £12.8 billion from £9.6 billion a year earlier.
Starling did not rely only on organic growth to boost its net interest income in the year. It actually used some of its “surplus capital and liquidity resources” to purchase “a £503m portfolio of mostly residential mortgage loans in April 2022” and “a £482m portfolio of mainly buy-to-let mortgages” in September of the same year.
Those efforts, among others, helped the company expand its interest income by a hair more than 218%, what Starling called “a result of increases in interest rates and the growth in Interest-Earning Assets, both through acquisitions, as noted above, and through Fleet’s mortgage originations.” (Fleet is Starling’s mortgage-focused subsidiary.)
Interest-based income was also helped by higher “placement of excess cash with the Bank of England [which] further contributed to the growth in Interest Income [aided by] rising interest rates, with the average investment yield increasing by 107bps to 1.27% (2022: 0.20%).”
For banks, rising interest rates can prove yummy.
While we await more recent financial disclosures from competing European and U.K.-based neobanks like Monzo, we can see clearly that the new, higher-rate environment is bolstering some of the most heavily venture-backed banking startups. Will the same apply to American neobanks like Chime?
It is impossible to know precisely, but there are a few ways to consider the question.
SoFi is an American fintech company that had raised billions during its time as a startup. In its most recent quarter, the diversified consumer fintech play — student loans, personal loans and a neobank component — saw its net interest income rise sharply. Is that a good sign for other American consumer fintechs with a consumer banking element? Probably.
Still, SoFi did note that it managed to attract a lot of deposits in the quarter, which helped it generate “$73 million of GAAP net income at a 20% margin.” Not bad, and we could probably assume that its competitors like Chime also enjoyed a similar benefit.
Given all this, it certainly appears that conditions are ripe for global neobanks to perform well.
That’s good news for Chime and its brethren. There was some concern that many neobanks were enjoying valuations that were too high, which could leave them stranded in a more conservative financial climate. Well, sure, but maybe there’s more good news in store for these companies.
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