Aboard his 92ft yacht in the Bahamas in June 2015, reclusive Austrian-born billionaire Harald McPike was investigating a new money-making opportunity.
Decades after seemingly making his first fortune at blackjack, the player-turned-investor had set his sights on Britain’s booming fintech market and invited Starling Bank founder Anne Boden on board.
The three-day New Life introductory meeting proved to be lucrative. McPike promised to invest £48m in Boden’s business in exchange for nearly two-thirds of the business – far more than the £3m she had hoped to get. This made it one of the largest seed funding rounds ever for a London-based startup. McPike would go on to invest at least £133m in the business, holding 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 in a fundraising or sold to new investors, who have piled money into Starling after its incredible growth. during the Covid crisis. The new funding, worth around £400m, took the bank’s valuation from over £1bn last spring to £2.5bn earlier this year, valuing McPike’s remaining stake at over £900m.
The pandemic turned out to be Starling’s moment in the sun. One of the new banks that aims to challenge Britain’s high street banking giants with technology, it has sucked in business customers during the crisis, handing out loans backed by state money. Starling is now set to report its first annual profit in the coming weeks – a step that could translate into a lucrative payout for shareholders, including McPike, if Boden follows through on plans to take the bank public as early as the year. next.
But Starling’s journey from scrappy startup to fintech unicorn has touched choppy waters, after a former minister raised concerns about Starling’s pace of growth, particularly through government-sponsored programs , including the Covid Business Loan Scheme. Lord Agnew, a former joint Cabinet minister and Treasury minister whose dossier included an anti-fraud role, came into battle with Boden last month after he claimed in a speech that Starling had used the Covid loan scheme “against the interests of government and taxpayers”, and as “a free marketing exercise to build their loan portfolio and thus their business valuation”. He also claimed that Starling failed to perform adequate checks on borrowers before issuing taxpayer-backed loans.
Agnew had resigned in January following the government’s “lamentable” efforts to control fraud under the wider Covid loan scheme, which is expected to cost the taxpayer up to £5billion. Some cases have been linked to individuals overestimating their income or spending money on cars and gambling, while others are believed to be linked to organized crime.
Boden said she was “shocked” by Agnew’s comments and has since signaled she may take legal action against the ex-minister over what she called defamatory statements.. Boden said Starling had been open and transparent about its approach to the Bounce Back Loan Program (BBLS) and was one of the “most active and effective banks in the fight against fraud.” The bank told the Observer he ‘very quickly informed regulators of the misrepresentations made by Lord Agnew’.
The row has drawn fresh attention to Starling’s meteoric growth and its use of Covid loan schemes. Boden, a former executive of the Royal Bank of Scotland and Allied Irish Banks (AIB), founded Starling in 2014 after 30 years in the industry. The start-up was among the first of so-called neo-banks, alongside Revolut and Monzo, to try to disrupt Britain’s big four lenders by ditching expensive branches and popularizing online-only services.
As Agnew pointed out in his controversial speech, Starling had only loaned out £23m, excluding loans bought from other companies, before the November 2019 pandemic. But as of June 2021, according to a business update from the company, it had distributed £1.6 billion worth of BBLS. loans.
These loans offered up to £50,000 per customer and were 100% government guaranteed, meaning taxpayers foot the bill if a customer defaults. It loaned out a further £640m under the wider Coronavirus Business Interruption Loan (CBILS) scheme, which offered up to £5m to a borrower.
It also means that almost all of Starling’s customer loan portfolio – excluding mortgages – is now backed by government guarantees.
Starling’s first alliance with government programs was to land a £100million grant in 2019 under a program funded by the Royal Bank of Scotland (partly state-owned) to improve competition in corporate banking. Starling credited the grant with ensuring it was “well positioned” to become a “significant lender” of Covid loans.
But unlike the big banks, which limited these Covid loans to existing customers who they said posed a lower risk of fraud, Starling opened its doors to new business customers, including sole traders and limited liability companies.
“Some of our new customers were established businesses that had been customers of major banks but were unable to get the timely support they needed from those banks due to their outdated systems and the fact that those banks have closed,” Starling said.
In its latest annual report, covering the 16 months to March 2021, Starling said it was managing 330,000 individual entrepreneur and business accounts, up from just 87,000 before the November 2019 pandemic. That means Starling may have taken on as many as 243,000 new customers over this period – an average of more than 15,000 per month – despite only having 1,245 employees at the end of this period.
By contrast, some of Britain’s biggest banks have told the Observer they generally “integrate” between 1,500 and 8,000 new professional clients per month.
While only a portion of Starling’s staff would have been tasked with checking all red flags associated with accounts – including those with potentially fraudulent applications for taxpayer-backed loans – Starling said he had “coverage and adequate hiring of staff”.[s] continuously as the portfolio grows”.
Starling has since grown its total commercial account pool to 470,000 and estimates it now represents 8% of the small business banking market.
Some experts believe the bank’s technology has probably been nimble enough to handle so many customers and their loan applications. But a tech investor, speaking anonymously, said that even if Boden was a high-caliber leader who wouldn’t intentionally cut corners, that rate of customer growth would have been an “insane” feat, even according to the fintech standards: “If there is so much volume added to the loan book so quickly, there are inevitably things that will be missed or overlooked.
In Starling’s own words, the “speed of response” of its technical team in May 2020, when it was accredited with the BBLS, “was breathtaking”, according to its annual report. He added in a statement that he had “one of the best banking platforms in the world, which we built from the ground up”, and that its systems “have been designed and built to routinely handle customer volumes at this level and beyond.”
He also said that when it came to government-backed Covid loans, every application was checked for ‘fraud flags’. It said it had more checks in place than most other lenders and more than required by the program, including systematic checks that automatically cross-checked BBLS applicants with the Companies House register and the date of establishment of the company.
“These were no ordinary loan programs. Banks were not allowed to perform financial capability checks on applicants,” Starling said. “We were audited twice and received the highest rated audit…both times.”
This growth has served its funders well. Boden’s remaining 4.9% stake is now worth around £123m, and McPike has seen the value of his stake – held through his special purpose vehicle JTC Starling Holdings – also soar.
McPike’s vehicle is managed by the Bahamas-based McPike Family Office, where there are no income or capital gains taxes. The Caribbean country was ranked the 12th worst tax haven in the world last year according to the Tax Justice Network 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 for a profit in subsequent funding rounds.
Boden said in a statement that “The government-backed loan schemes have been designed to facilitate fast and affordable loans, at scale, to support UK SMEs in times of crisis. As such, Starling was excited to pitch in to help small businesses.