1077. Insights: What does it take to build the bank of the future? With Engine by Starling

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1:57Hello and welcome to Fintech Insider Insights. I'm Ross Gallagher, Head of Consulting at 11FS. Today we're joined by two leaders from Engine by Starling, the banking technology business born out of Starling Bank's own journey to becoming one of the UK's most successful digital banks. Joining us are Sam Everington, CEO of Engine by Starling, and Jody Begat, President of North America at Engine by Starling. Now, Engine has taken the technology that powered Starling's rise and transformed it into a standalone proposition, helping banks around the world modernize their infrastructure, launch products faster, and navigate an increasingly complex technology landscape.

2:39As banks grapple with legacy systems, AI ambitions, evolving customer expectations, and growing competitive pressure, Engine sits at the heart of some of the industry's most important technology decisions Sam, Jody, first of all, welcome to the show. It's a real pleasure to have you both. How are you guys doing? Yeah, good, thank you. It's great to be here today. Thank you for having us, Russ. Yeah, real pleasure. Thank you guys for coming on. Well, look, it's great to have you both here to talk about the engine proposition. I think we sort of summed it up there pretty well in the intro, but playing, I think, sort of right at the intersection of a number of the sort of key trends that are impacting our industry at the moment.

3:23Sam, maybe it's worth rewinding a little bit. You know, Engine started life as the technology that powered Starling Bank itself. It'd be maybe good to get a little bit of the origin story. Sort of at what point did you realize that you built something that could become a standalone business maybe in its own right? Yeah, it's a great question. We clearly built a successful business in Starling. I've been there for 10 years now. I joined a 20-something person startup. And we could see in Starling the impact. it was having on customers in the UK. The kind of two things we're very proud of sitting right at the top of the customer satisfaction tables and the economics of the bank ultimately operating that very efficiently despite that customer's light.

4:05A lot of that came from the speed, the agility, the pace at which we could release products and capabilities to support customers and be responsive and adaptive to their needs. So there's a whole list of kind of industry first and things selling is done and where we've moved the market forward and other banks are caught up and that's clearly something we're proud of. And then Starling is born out of really assessing ourselves where did the strength lies, the business and the experience we have running these delightful digitally native kind of customer facing journeys, but also the operating process behind that sits behind a genuinely digital first bank and uniquely doing that profitably.

4:48We were one of the first digital banks anywhere to reach profitability. And inevitably that led to study tours, for want of a better word, ex-co's and boards turning out from different banks and other markets with their favorite consulting firms. And the questions to understand what Starlink had done differently and what should have kept the same. It's in no doubt that most banks are very profitable, they're very successful businesses in the markets they operate in. How have we got there? And some those ended in can we co-invest can we form a jv to replicate what styling has done in our home market and across many conversations and signing well strengths like engine engine really came out of that okay actually what if we did that because we know how hard it is to scale the other side the licenses the brand the trust the regulatory and credit risk experience expanding banks internationally has been tried many times and most retrenched from that so take our product and our tech with established entities instead, can we have an impact on many more customers much, much faster than we could do on our own.

5:52Excellent. And Jody, what obviously, I mean, Sam mentioned that Starling has sort of grown to become one of the biggest and most successful banks here in the UK. What sort of convinced you that there was that sort of global market opportunity for the technology that Sam mentioned beyond Starling itself? Yeah, thanks, Ross. It's a fascinating time. By the way, first of all, acknowledgments to 11FS for really moving the industry forward. We think that you play a really important role in this. You know, in the banking industry, there's this notion called the banking productivity paradox. The banking industry invests heavily in technology, and yet it's one of the few industries that has not enjoyed an increase in efficiency or productivity over the last decade.

6:38And frankly, I believe that's largely because the investments go into maintaining old legacy cores and frankly, just getting systems to talk to one another. So, you know, in summary, the banking industry is really held back by the legacy technology stack. And in an environment where the pace of change is so rapid, The industry should enjoy the benefits of really a modern technology platform. And Enjin is unique in that we are an operating bank from Starling and also a modern technology platform. So at the risk of being, let's say, overly aspirational, we believe that a modern technology platform like Enjin can really unleash the potential of banks and credit unions and their employees.

7:28Yeah, I mean, I couldn't agree more. And thank you, Jody, for your kind words about 11FS, obviously, very much reciprocated in so far as it relates to Starling. I guess I couldn't agree with you more about the investments in technology, not then necessarily sort of translating through in terms of the uplift in productivity. I mean, Sam, you mentioned in your piece around the sort of how engine came to be across the technology is one layer, but I suppose it's only one layer. There's obviously there's the operational side of it and all of that sort of stuff. So how do you partner with some of those banks from that respect as well?

8:13It's fundamentally business transformation rather than technology transformation. if you genuinely want to become digital first rather than as a support cost-saving channel, which is how most of them came about, you really have to rethink the organization top-down, the kind of operator models, the way you handle and you support and deal with requests from your customers and the way you manage change as an organization. You can't sit still and tattic the days of three-year technology roadmaps and big investments and long-term planned change are coming to an end. and so a lot of it is sharing experience much more broadly than that.

8:49Yes, we know what the customer journeys can look like and we've tested and battle-hardened those. Yes, we've got a good view on how operating processes could work in each market but it's also how to manage the organization and people are looking for us to share that experience as well from engineering teams and release cycles and approvals and how you work within risk and compliance functions and regulators to do things differently because they're lessons we've learned the hard way over a long period of time. And we're very happy to share that knowledge as part of this partnership too. And yeah, I mean, that's, you know, it's, of course, it's easy to sit here and look at all of the success that Starling has had both in terms of establishing itself, as we said, as one of the most innovative and most successful banks here in the UK.

9:34And obviously then, with all of the success that you've had with Engine, but maybe worth double clicking, Sam, as well on some of those challenges, as you mentioned, I mean, you know, it's not easy making a transition from that being an internal platform through to being a technology provider serving other financial institutions. I guess you probably, both of you guys have got some scars on your back from that as well. I'm smiling. It's certainly not an easy journey. Banks are not an obvious parent company, so technology business as well. It's not what you'd expect. I think, and I get asked this question reasonably often by the banks we're talking to as well and people assume it's localizing the product for different markets, removing specific behavior that you built for yourself, even dealing with the concept of having multiple customers actually.

10:25Those things aren't particularly hard or aren't new if you build the technology in the right way or modern practices and having multiple customers, every bank has that. Finance want different things to operations, want different things to P &L owners. I had a world of stakeholders when I was doing this job just for Starling the real challenge as a product company is clarifying the boundaries where do we stop, what is bank specific when you're doing it in-house you have to get to the very end of the line if you're producing a repeatable consumable product there's a boundary to be drawn clarifying that, documenting it, explaining the how and the why for everything so that it's consumable by externals who haven't grown up with that organization over the years is a real shift in how you think about it and how you work.

11:13And that's actually the hardest transition to make, I think. Yeah. Jody, what do you think are some of the big hurdles, the big challenges that banks are really facing into when they're looking at sort of modernizing their current technology stacks the way that they do things? What are you seeing when you're talking to some of your partners? Well, the good news is that the industry has really embraced modernization as an important facet of staying current and staying competitive. Clearly, the landscape is evolving rapidly, really forcing banks to really level up their game and their capability as well.

11:57I think there's three factors that I would suggest may need greater attention So in the past, let's say over the past decade, it was appropriate and maybe even practical to focus on system-specific modernization. That is that when a specific system or module became obsolete, then you'd modernize that system. Let's call that kind of point solution modernization. That was very viable and probably appropriate for the time. Given the pace of change, we believe that speed is quite vital. And so the speed of modernization also needs to accelerate. You know, most mid-tier banks have an efficiency ratio of around, let's say, 60 % or so.

12:47We think that needs to dramatically improve. So that's one factor, that the speed of modernization is becoming more vital. I say the second with this point solution modernization approach where each system is enhancing capabilities, but only with the intent of improving the capabilities of that system. We believe there's real value and utility in the synergy across the platform, across the tech stack. That's the advantage, of course, that Engine has around being built from scratch and built really coherently and synergistically. So that's the second element that really should be factored in. And the third, which is probably the most important, sometimes these exercises are largely delegated to the IT team, particularly if you're doing something significant like a core upgrade or any kind of system upgrade.

13:41We believe that if you're really going to embark on modernization, that is a management team-led exercise. It is not about upgrading a system. It is about achieving a balanced scorecard of outcomes where the entire management team really has a vested interest and has ownership of outcomes, leveraging the technology, ownership of outcomes that will ladder up to the overall business case. So those are the, I'd say, the three factors that perhaps need even greater emphasis in modernization programs moving forward. That's really interesting. And Sam, I guess, in your experience, rolling this out with banking partners, is it fair to assume that there's no sort of one size fits all when it comes to some of the things that Jody just described?

14:28So yeah, every bank is different in its knees and at its starting point as well. And so organizations react to their experience, their history, the challenges they faced. And we all as humans kind of over-index on the response to that. And so some of the things you're dealing with are just the legacy of history and the trials and tribulations that organization has been through. And so part of this, you need to understand their drivers, their fears, their areas of concern, the things that are going to be a real challenge. and focus on addressing those first. Yeah. I'm interested as well, Jody, in perhaps some of the differences that you're seeing in sort of leading engines expansion in the North American market.

15:14Do you feel that fundamentally some of the challenges that banks in North America are facing into are different to the UK or are they quite similar? Where are we at from that perspective? it? Well, I like to say that, you know, banking is a noble profession and it's a noble profession globally, but there are some very fascinating problems and challenges. I'll just say fascinating dynamics that are at play in North America. And I'll specifically touch on the U.S. banking and credit union system as well. So first of all, it's a very diverse group, 9 ,000 plus banks and credit unions. And new entrant challengers are a second factor that is really becoming much more germane to the U.S.

16:00market. For instance, Chime now has over 9 million customers, even though the business model is different. That's a very healthy customer base to draw on. And you can imagine that the attachment rate will certainly go up and the revenue per customer will certainly grow up. And the third factor is really, we were likely in the midst of likely the most intensive M &A wave that the market is seeing over the last several years. So those are three, let's say, prevailing factors that are critical for the U.S. market. And as I mentioned before, with an efficiency ratio of around or cost to income ratio of around 60 % for mid-tier banks and credit unions, our belief is that you really have a three-year window to significantly improve your efficiency ratio, let's say by five points, to have a more distinctive customer experience that you can offer.

17:00because the moats around the traditional branch-based model are starting to evaporate. And thirdly, focusing on a segment that you can really over-serve and win. And I think that's the right kind of target to shoot for because it creates a greater aspiration. It creates a greater need to be able to move at speed with greater distinctiveness and really thinking about how you're going to over-serve and win your customer segment. And that's what the technology platform needs to enable. And that's why we're so excited about bringing a platform with really, frankly, focused on progressive banks and credit unions and progressive leadership teams.

17:48But that's ones that really want to lead in the future because we will certainly see greater separation between leaders and laggards in terms of performance. moving forward. Yeah, I love that. And Jody, you know, when banks are looking at who the right technology partner could be, where do you think, what are they looking at in terms of what they're evaluating and where do you think, what are some of the areas that engine can really stand out? So one of the things we're particularly excited about is having a different economic model for a more efficient deposit acquisition engine. You know, deposit acquisition and creating a deposit the customer franchise around deposits is vital around for banks globally.

18:32And the notion that if you are going to operate, for instance, a digital lead expansion, that is a digital bank expansion, let's say across states or in different markets, the traditional notion is that you have to have a slick account opening and you have to pay up for deposits. You may have to be at the top of the rate tables, let's say at 90th percentile plus around weighted average market pricing. And we believe there's a different model out there. In fact, Starling exhibits this model, and Engine can really unlock this model as well, which we call an Engine-inspired, digital-led deposit acquisition economic case.

19:10And it's built on this, let's call this flywheel effect, where you have a distinctive proposition you put into the market, and clearly that's exhibited by Starling's distinctiveness of its proposition. it attracts a mix of deposits, including non-interest-bearing deposits, which allows you to have relatively low cost of funds. That in turn creates a higher deposit retention and greater relationship primacy as well. So this deposit acquisition machine is really based on not just paying up, for instance, high savings rates, but based on a more efficient deposit acquisition machine that results in a lower cost of funds, which we think is attractive for all banks and particularly banks in the U.S.

20:04that are striving to grow and may not have a chance to just grow inorganically. So this is a very, what we think is attractive flywheel effect starting with a deposit acquisition, creating a lot of interest-sparing deposits which results in a low cost of funds and strong deposit retention. And this is what the technology stack should really enable banks to do, which is to deliver on a more compelling brand promise and offering for their customers. All right, excellent. Well, that first segment seems to have absolutely flown. 15 minutes is nothing at all really when you start to get into it. But look, please don't go anywhere because after the break, we're going to be moving on to discussing what the future of banking technology looks like.

20:54And of course, whether AI could fundamentally change how banks are built and operated.

21:27So good, so good, so good. Experience a membership that backs what you're building with American Express Business Platinum. Unlock over$4 ,000 in business and travel value annually with statement credits on select purchases from brands like Dell, ChatGPT Business, Hilton and Adobe, and other benefits. American Express Business Platinum. There's nothing like it. Based on total potential value of statement credits on select purchases and other benefits, enrollments required, monthly, and other limits and terms apply. Learn more at americanexpress.com slash business dash platinum. Okay, welcome back to Fintech Insider Insights, where I'm in conversation with Sam Everington, CEO of Engine by Starling, and Jody Begat, the President of North America that is for Engine by Starling.

22:15Before the break, we explored how banks are approaching technology transformation and the challenges of modernizing legacy infrastructure. So in this second segment, we're going to start looking ahead to what's next. Sam, I guess it's hard to have any sort of conversation today around what's next or any sort of future focused conversation without talking about AI. Obviously, it's dominating almost every conversation in financial services today. Maybe to be good, just to get your perspective on how you see AI changing banking operations specifically over the next five years or so. Yeah, it's a fascinating space and you can't get through a single conversation with a board or an ex-co without this coming up at some point.

22:59Everyone's wondering what's next and what they're missing. What do they need to be doing now to make sure they're not left behind? And I think a lot of the focus is still on the operating side, the operation and efficiency side, and there's clearly a lot we can do there. But in some ways, for many organizations, that's just using AI to plug things humans are doing today, which is to plug deficiencies in their systems and automation that was already possible without AI. It's just a lot of underinvestment has led to manual purposes, swivel chairing, as it's often called at a bank operating center.

23:35And I think what really excites me about that is not just the operating side and servicing customers better, actually making banks more human ultimately. If you take away the mundane process, you can spend more time focusing on the individual needs of those customers. But it's really using it to solve problems for customers and Starling and the journey it's been on here is a great example of it. Yes, they're doing things to make life more efficient and to improve the quality of interactions, the kind of automated call summary and call wrap that we have now saves something like 8 ,000 hours a month for our team writing up call notes.

24:10But getting it into customers' hands is where it gets really interesting with spending intelligence first, asking questions about spending. It's more of a governance test case than anything to start getting tools in front of people. You could do the same with spending insights that existed, but it's a good step. And then it starts to get really interesting where you bring general knowledge of the world into it. So as we stepped through scam intelligence, taking a photo of something you intend to pay for, and the AI giving an idea of fraud indicators, this deal looks too good to be true. You're being time pressured to do this.

24:42Have you thought about whether this WhatsApp message from your child really is from your child in the emotional moment that you're going through? Right the way through to the Starling Assistant launch, launched most recently the first properly agentic assistant in all customers' hands in UK banking. so it's that part that really excites me actually using the technology to make banking more personal more human more more fit for purpose around you rather than guiding you through a set of processes and journeys yeah and and i suppose delivering delivering new or richer or more valuable customer outcomes or delivering maybe outcomes in in in sort of in different ways um i'm curious though because obviously you know as is the case with um With any hype cycle, I suppose there are lots of views of sort of where this goes and the ultimate impact.

25:35Do you think there are areas that the industry might be overestimating or underestimating in terms of its impact? Yeah, there's some quick wins that will have the biggest impact. And that's the case with nearly all bits of technology. And then you reach the point of trading off the cost of the technology, the cost of the change versus the benefits it can bring. and a lot of AI is just being used for old conditional logical if statements. They're probably quicker to process and probably quicker to develop and easier to audit and control and govern in a bank context and the governance around this is really, really important in certainty of outcomes.

26:11So it's not the silver bullet that should be applied to every situation. There's specific kinds of problems where general knowledge of the wider world is a really big contributor that no bank could ever program into it. there's many, many problems you're best off solving the traditional software way. Yeah, I couldn't agree more. Jody, one of the things that stood out for me in the previous segment was the point that you were making around the investments that a lot of banks have made into sort of different transformation programs, updating their technology stack and not necessarily seeing the productivity gains that you might expect.

26:49does AI start to compound some of those issues? Yeah, well, I think banks are actually moving incredibly fast in some dimensions. For instance, they're moving incredibly fast at buying software and setting up teams focused on AI, setting up sandboxes, internal sandboxes for their employees to pilot solutions, developing demos. And so there's certainly a lot of value that can be gained from those kinds of efforts. The failure point, though, Ross, is the historical one, the historical challenge. And it's just exacerbated in a world of AI. So let's take a set of agentic solutions or even a transformed agentic bank.

27:33First thing that an agentic platform needs is a full view of customer operational, transactional and financial data to identify when an agentic solution should be initiated, an agentic action should be initiated. The second thing it needs is rich API orchestration to be able to take action, just like a human would take action. That agent needs API orchestration at a granular level to be able to take action. And the last thing it needs is the ability to have full auditability and control at scale, which is really an event-based architecture. So as thrilling as it is in terms of the unlock that AI presents, it does go back to the historical challenges that have plagued the industry for improvement initiatives over the years, which is some of the foundational capabilities, the 360 view of customer, the rich API orchestration, and a real-time event-based architecture, which really creates what we believe is the modern platform to excel in a world of AI.

28:49So that was really interesting, isn't it? Because you mentioned that AI isn't going to be this silver bullet, and it's certainly not this, you know, you're not just going to wake up one day, plug it in, and everything's going to be done. I mean, I think Jody started to bring a lot of that to life and some of those foundational elements that are so important. Data, I mean, things like audibility are non-trivial. And I think, you know, the reality is that there's a real, we have to go on a real journey here before we start to deliver some of the outcomes that you mentioned. Yeah, completely. Jody's talked about the technology capabilities that need to be there that are going to necessitate a real investment in core capability to deliver that context to the models because they're only as good as the context is there.

29:41I think that overlooked the other foundations you need in place. There's a very different way of governing change and outcomes. Core banking and core banking contracts are very prescriptive around the system doing exactly what the documentation said. AI doesn't have that and you want, I mean, even PSD2 and things mandates it, you want six months of deprecation. those just for something to change. But the general availability models of Gemini and that kind of thing can be deprecated in weeks. If you can't process full deprecation replacement change cycles in weeks, and you can't govern uncertain outcomes in the context of all your regulatory obligations of consumer duty, vulnerable customers, that kind of thing, you won't be able to make use of these tools.