The Covid loans, the billionaire … and Starling, the very fast growing bank | fintech – Natural Self Esteem

Aboard his 92-foot yacht in the Bahamas in June 2015, reclusive Austrian-born billionaire Harald McPike explored a new way to make money.

Decades after reportedly making his first fortune playing blackjack, the player-turned-investor had set his sights on the burgeoning UK fintech market and invited Starling Bank founder Anne Boden on board.

The three-day New Life introductory meeting proved lucrative. McPike pledged to invest £48million in Boden’s company in exchange for nearly two-thirds of the deal – far more than the £3million she had hoped for. That made it one of the largest seed funding rounds ever for a London-based startup. McPike would continue to invest at least £133million in the company and would hold shares through his offshore family office in the Caribbean tax haven.

The billionaire’s stake has since been reduced to 36%, according to Starling, although the bank did not respond to questions about whether McPike’s position had been diluted through a capital raise or sold to new investors who had piled money into Starling following its incredible growth during the Covid-19 Crisis. This new financing, valued at around £400m, has boosted the bank’s valuation from more than £1bn last spring to £2.5bn earlier this year, putting McPike’s remaining stake at more than £900m.

The pandemic turned out to be Starling’s moment in the sun. One of a generation of new banks aiming to challenge Britain’s high street banking giants with technology, it has been sucking up corporate customers and lending backed by state funds during the crisis. Starling is now expected to report its first full-year profit in the coming weeks — a milestone that could result in a lucrative payout for shareholders, including McPike, if Boden follows up on his plans to take the bank public as early as next year , performs.

But Starling’s journey from seedy startup to fintech unicorn has hit rocky waters after a former minister raised concerns about Starling’s pace of growth, particularly through government-backed schemes, including the Covid business loan scheme. Lord Agnew, a former joint cabinet and finance minister whose job included a role in fighting fraud, entered the fray with Boden last month after he claimed in a speech that Starling had run the Covid loan scheme “against the interests of the government and the taxpayer” used as a “free marketing exercise to build their loan book and thus their business valuation”. He also alleged that Starling failed to adequately screen borrowers before issuing taxpayer-backed loans.

Agnew resigned in January over the government’s “pathetic” efforts to control fraud in the broader Covid loan scheme, which is expected to cost taxpayers up to £5bn. Some cases have been linked to people overstating their earnings or spending money on cars and gambling, while others were believed to be linked to organized crime.

Lord Agnew with other people including Rishi Sunak outside the black door of 11 Downing Street.
Lord Agnew said in a speech that Starling had used the BBLS “against taxpayer interests” and “to build up their loan book and therefore their company valuation”. Photo: PjrNews/Alamy

Boden said she was “shocked” by Agnew’s comments and has since signaled she could take legal action against the ex-minister over her alleged defamatory statements. Boden said Starling has been open and transparent about its approach to the Bounce Back Loan Scheme (BBLS) and is one of the “most active and effective banks in the fight against fraud.” The bank announced this observer it “very promptly informed regulators of Lord Agnew’s untrue statements”.

The dispute has drawn attention to Starling’s stellar growth and use of Covid loan schemes. Boden, a former manager at the Royal Bank of Scotland and Allied Irish Banks (AIB), founded Starling in 2014 after 30 years in the industry. The upstart was among the first of the so-called neo-banks, along with Revolut and Monzo, to seek to disrupt Britain’s Big Four lenders by liquidating costly branches and popularizing online-only services.

As Agnew pointed out in his controversial speech, Starling had just 23 million loans prior to the November 2019 pandemic.

These loans offered up to £50,000 per customer and were 100% guaranteed by the government, meaning taxpayers foot the bill if a customer defaults. It lent a further £640million under the larger Coronavirus Business Interruption Loan Scheme (CBILS), which offered up to £5million to a borrower.

It also means nearly all of Starling’s customer loan book — excluding mortgages — is now backed by government guarantees.

Starling’s first collaboration with government programs was a $100m grant in 2019. Starling credited that grant with ensuring it was “well placed” to become a “significant lender” of Covid loans.

But unlike the big banks, which limited these Covid loans to existing customers who they claimed posed a lower risk of fraud, Starling opened its doors to new business customers, including sole traders and limited partnerships.

“Some of our new customers were established companies that were customers of larger banks but were unable to get the support they needed from those banks in a timely manner due to their outdated systems and the fact that those banks had closed their doors,” Starling said.

In its most recent annual report, covering the 16 months ended March 2021, Starling said it had 330,000 sole proprietor and business accounts, up from just 87,000 before the pandemic in November 2019. That means Starling may have added as many as 243,000 new customers in during this period – averaging more than 15,000 per month – although at the end of this period only 1,245 people were employed.

In contrast, some of the UK’s largest banks said so observer they typically onboard between 1,500 and 8,000 new business customers per month.

While only a portion of Starling’s staff would have been assigned to review all red flags associated with the accounts — including those with potentially fraudulent taxpayer-backed loan applications — Starling said it had “adequate staffing coverage and hiring.”[s] continuously as the portfolio grows”.

Since then, Starling has grown its total pool of business accounts to 470,000 and estimates it now accounts for 8% of the small business banking market.

Some experts believe the bank’s technology was probably nimble enough to process so many customers and their loan applications. But one tech investor anonymously said that while Boden was a high-profile leader who wouldn’t cut corners on purpose, that pace of customer growth would have been an “insane” achievement even by fintech standards: “If there’s that much volume, that added to the loan book so quickly, there are inevitably things that are overlooked or overlooked.”

In Starling’s own words, his tech team’s “speed of reaction” in May 2020, when it was accredited to the BBLS, was “breathtaking” according to its annual report. It added in a statement that it owns “one of the best banking platforms in the world that we’ve built from the ground up.” and that its systems “were designed and built to routinely process customer volumes at this level and much larger.”

It also said that for government-backed Covid loans, every application for “fraud flags” would be checked. It said it carried out more checks than many other lenders and more than required by the system, including systematic checks that automatically cross-checked BBLS applicants against Companies House register and company incorporation date.

“These were no ordinary loan programs. Banks were not allowed to conduct affordability checks on applicants,” Starling said. “We underwent two audits and we received the highest grade audit both times.”

This growth has served its supporters well. Boden’s remaining 4.9% stake is now worth an estimated £123m and McPike has seen the value of his stake – held through his special purpose vehicle JTC Starling Holdings – rise sharply too.

McPike’s vehicle is managed by McPike Family Office based in the Bahamas, where there is no income or capital gains tax. The Caribbean country was ranked the 12th-worst global tax haven last year, according to the Tax Justice Network’s own index.

McPike did not respond to requests for comment, and Starling did not respond to questions about whether Boden’s or McPike’s stake had been diluted or sold at a profit in subsequent financing rounds.

Boden said in a statement that “Government-backed lending schemes have been designed to provide rapid, affordable, large-scale lending to support UK SMEs in a time of crisis. As such, Starling was delighted to participate to help small businesses.”

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