The maturation of challenger banks

The inception, progress, rise and struggle of challenger banks has always been a source of constant fascination to me. I’m not sure if it is their rapid growth which holds my attention – or my simple love of a good underdog story – but they are rarely out of the business news pages.

Late last week Anne Boden, CEO of Starling Bank, boldly stated that she expects the bank to be ready to float on the open market by the end of 2022. The fact that one of these unicorns is now preparing itself for an IPO signals a huge step in the maturation of the challenger bank. While these businesses have gained impressive investment from high-profile players – notably Fidelity’s investment in Starling’s Series D – they have never been deemed to be in a solid enough position to brave the open markets, until now.

Starling would be the first in what one would expect to be a run of similar offerings. Crucially, the reason why it can now start to entertain the idea of flotation is because it has turned profitable for the first time. It is the first of its peers to have achieved this feat and has started to build its investment story around it. Not only did the announcement get a big PR push resulting in many articles in the nationals, Anne Boden recently hammered the point home in an interview with City AM.

However, Starling’s move towards an IPO will inevitably bring questions around potentially premature timing. The flagship float of this year, Deliveroo, floundered on the fact that it did not have an established track record of making money. Investors were sceptical that it would be able to convert a loss-making business into the punchy profits it forecasted.

Nevertheless, Boden seems to be wise to this cynicism. She stressed that Starling would do this in its own time, and it was “not going to be forced to do it because it’s fashionable at the moment”. Wise words indeed.

Regardless of any scepticism, the fact that the CEO of one of the UK’s leading challenger banks is talking about a float is evidence in itself that these unicorns are maturing at a rapid rate into well established and reputable businesses. During an interview for an FT podcast, Mark Mullen, CEO of Atom Bank, stated that as a business “you can only be young once”. Recent developments show that challenger banks are no longer that young. Indeed, should they even be called challengers anymore?

Their next step is crucial. While challenger banks cement their positions in the mainstream, it is essential that they do not lose sight of what set them apart from the traditional banks in the first place. They gained traction because they were new, exciting, and innovative. To keep this image will be a key challenge which will prove critical to their success. Furthermore, these challengers now also have a new communications issue to contend with in terms of how to position their investment case to the market.

However, while both of these challenges will need to be met with careful planning and meticulous execution, it will be fascinating to observe where the story goes next.