Royal Bank of Scotland (RBS) has reportedly enlisted the help of challenger bank Starling in its efforts to develop a digital bank of its own.
The news, reported by The Times newspaper, came as a result of a letter to shareholders from Starling's chief executive Anne Boden which stated that it has signed a contract "to provide payment services to support new initiatives at RBS/NatWest".
According to The Times, these initiatives include "a secret project to build a standalone digital bank".
The letter was published as part of Starling's annual results. From November 2016 to 2017, the startup bank grew its number of accounts fivefold from 43,000 to 210,000 with an average deposit of £900. By comparison, fellow challenger bank Monzo had 750,000 account holders by February 2018 but with an average deposit of less than £100, a figure mitigated by the fact that it only began taking deposits relatively recently.
Starling's pre-tax loss for 2017 also grew from £4.3m to £11.9m during 2017, compared to a £33m loss posted by Monzo between February 2017 to 2018.
The deal with RBS has been seen as an example of its new platform-as-a-service offering, an API-driven product whereby it provides its underlying payments infrastructure to other institutions looking to establish a digital banking service. Starling has already struck such a deal with online savings platform Raisin UK.
Analysts have praised the logic of such a strategy whereby fintechs such as Starling look to generate revenue from their technology and collaborate with incumbent institutions with much greater scale in terms of infrastructure and customers.
Furthermore, the introduction of the Payment Services Directive 2 and its concept of Open Banking, whereby banks must make customer data available to other financial institutions and payment services providers, is likely to grow the number of collaborations between new and old banks. Starling's CEO Boden also suggested as much in the bank's annual report.
"We believe that the banking industry as a whole is at a tipping point. The API economy, new payments legislation such as PSD2 and Open Banking, together with scaleable Banking-as-a-Service propositions such as we offer, are revolutionising the banking industry," wrote Boden.
“We believe that the fintechs that succeed will be the ones that can maintain growth and operate efficiently at scale while continuing to innovate and deliver an excellent customer experience," she wrote. "Anything that doesn’t put customer interests first will become redundant and fail.”