The Covid loans, the billionaire … and Starling, the very fast-growing bank

Aboard his 92-foot yacht in the Bahamas in June 2015, the reclusive Austrian-born billionaire Harald McPike was investigating a new moneymaking opportunity.

Decades after reportedly making his first fortune in blackjack, the gambler turned investor had set his sights on the burgeoning UK fintech market and invited the founder of Starling Bank, Anne Boden, aboard.

The three-day introductory meeting on the New Life proved lucrative. McPike promised to invest £48m in Boden’s venture in exchange for nearly two-thirds of the business – far more than the £3m she had hoped to secure. That made it one of the largest ever seed-funding rounds for a London-based startup. McPike would go on to invest at least £133m in the business, holding shares via his offshore family office in the Caribbean tax haven.

The billionaire’s stake has since been reduced to 36%, according to Starling, though the bank did not respond to questions over whether McPike’s position had been diluted in a capital raising, or sold to new investors, who piled money into Starling after its incredible growth during the Covid crisis. That fresh funding, worth about £400m, pushed the bank’s valuation from more than £1bn last spring to £2.5bn earlier this year, pricing McPike’s remaining stake at more than £900m.

The pandemic proved to be Starling’s moment in the sun. One of a breed of new banks that aims to challenge the UK high street banking giants with technology, it sucked up business customers during the crisis, handing out loans backed with state cash. Starling is now expected to report its first annual profit in the coming weeks – a milestone that could result in a lucrative payout for shareholders, including McPike, if Boden follows through on plans to float the bank on the stock exchange as early as next year.

But Starling’s journey from scrappy startup to fintech unicorn has hit choppy waters, after a former minister raised concerns about the pace of Starling’s growth, particularly through government-sponsored schemes including the Covid business loan programme. Lord Agnew, a former joint Cabinet Office and Treasury minister whose brief included an anti-fraud role, entered into battle with Boden last month after claiming in a speech that Starling had used the Covid loan scheme “against the government’s and taxpayer’s interests,” and as a “cost-free marketing exercise to build their loan book and so their company valuation”. He also claimed that Starling did not run adequate checks on borrowers before handing out taxpayer-backed loans.

Agnew had stepped down in January over the government’s “woeful” efforts to control fraud in the wider Covid loan scheme, which is expected to cost the taxpayer as much as £5bn. Some cases have been linked to individuals overstating their revenue or spending money on cars and gambling, while others are believed to be linked to organised crime.

Boden said she was “shocked” by Agnew’s comments, and has since signalled she may take legal action against the ex-minister over what she said were defamatory statements. Boden has 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 fighting fraud”. The bank told the Observer it “very promptly notified regulators of the untrue statements made by Lord Agnew”.

The row has turned fresh attention on Starling’s stellar growth, and its use of Covid loan schemes. Boden, a former Royal Bank of Scotland and Allied Irish Banks (AIB) executive, founded Starling in 2014 after 30 years in the industry. The upstart was among the first of the so-called neo-banks, alongside Revolut and Monzo, to try to disrupt the big four UK lenders by ditching costly branches and popularising online-only services.

As Agnew highlighted in his controversial speech, Starling had only lent £23m, excluding loans bought from other companies, before the pandemic in November 2019. But by June 2021, according to a company trading update, it had distributed £1.6bn worth of BBLS loans.

Those 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 £640m under the larger coronavirus business interruption loan scheme (CBILS), which offered up to £5m a borrower.

That also means that nearly the entirety of Starling’s customer loan book – excluding mortgages – is now covered by government guarantees.

Starling’s first dalliance with government schemes was clinching a £100m grant in 2019 through a programme funded by Royal Bank of Scotland (which was part state-owned) meant to improve competition in business banking. Starling credited that grant with ensuring it was “well placed” to become a “significant lender” of Covid loans.

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

“Some of our new customers were established businesses who had been customers of larger banks but could not get the support they needed in a timely manner from these banks due to their antiquated systems and the fact that these banks shut their doors,” Starling said.

In its last annual report, covering the 16 months to March 2021, Starling said it was running 330,000 sole trader and business accounts, up from just 87,000 before the pandemic in November 2019. That means Starling may have taken on up to 243,000 new customers over that period – an average of more than 15,000 a month – despite having just 1,245 staff at the end of that period.

By contrast, some of the biggest UK banks told the Observer they usually “onboard” between 1,500 and 8,000 new business customers a month.

While only a portion of Starling’s staff would have been tasked with checking any red flags associated with the accounts – including those with potentially fraudulent applications for taxpayer-backed loans – Starling said it had “adequate staff coverage and hire[s] continually as the portfolio grows”.

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

Some experts believe the bank’s technology is likely to have been nimble enough to process that many customers and their loan applications. But one tech investor, speaking anonymously, said that while Boden was a high-calibre leader who would not intentionally cut corners, that pace of customer growth would have been an “insane” feat, even by fintech standards: “If there is that much volume added to the loan book that quickly, there are inevitably things that will be missed or overlooked.”

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

It also said that when it came to government-backed Covid loans, every application was checked for “fraud flags”. It said it had put in more controls than many of the other lenders and more than were prescribed by the scheme, including systematic checks that automatically cross-referenced BBLS applicants against the Companies House register and the company formation date.

“These were no ordinary lending schemes. Banks were not allowed to perform affordability checks on applicants,” Starling said. “We have been subject to two audits and we received the highest graded audit … both times.”

That growth has served its backers well. Boden’s remaining 4.9% stake is now worth an estimated £123m, and McPike has seen the value of his stake – held via his special purpose vehicle JTC Starling Holdings – also soar.

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

McPike did not respond to requests for comment and Starling did not respond to questions regarding whether Boden’s or McPike’s stake had been diluted or sold off at a profit through subsequent funding rounds.

Boden said in a statement that “the government-backed lending schemes were designed to facilitate rapid, affordable lending, at scale, to support the UK’s SMEs at a time of crisis. As such, Starling was delighted to take part to help small businesses.”