Starling Bank’s latest annual report for the fiscal year ending March 31, 2025, reveals a complex financial landscape for the digital challenger. While the bank continues to expand its customer base and revenue streams, its pre-tax profits have seen a notable decline, significantly affected by a hefty fine from the FCA and provisions for problematic COVID-era loans. This comes amidst reports of a substantial increase in bonus payouts to staff, drawing scrutiny from observers.

According to the bank’s published results, pre-tax profit fell to £223m ($302m), a nearly 26% drop from the previous year’s £301m ($408m). Starling attributes this dip primarily to “one-off costs relating to two legacy matters.” These include a £29m ($39m) penalty imposed by the FCA for financial crime controls and a £28.2m (($38.2m) provision set aside for a group of COVID-era Bounce Back Loans that Starling said, “potentially did not comply with a guarantee requirement.”

Lax controls and legacy issues

The FCA’s fine, detailed in a report on GRIP, stemmed from significant failings in Starling’s financial sanctions screening. The regulator stated that Starling’s controls were “shockingly lax,” leaving the financial system vulnerable to criminals and sanctioned individuals.

The bank was also found to have repeatedly breached pre-existing regulatory requirements by opening accounts for high-risk customers, a concern highlighted in earlier FCA reviews of challenger bank financial crime controls. Starling has acknowledged these failings and states it has since built a stronger framework, though it still faces restrictions on banking with higher-risk customers.

Further affecting the bank’s profitability were issues surrounding its COVID-era lending. The FT and other outlets have reported on concerns regarding Starling’s administration of government-backed Bounce Back Loans, with some loans failing to meet eligibility criteria. Starling has confirmed it agreed to remove the government guarantee on these problematic loans.

Bonus payouts

Despite these significant financial hits, Starling Bank has significantly increased its bonus payouts to staff. For the 2024-25 financial year, the digital lender paid out £24.6m ($33.3m), an almost fivefold increase from £5.3m ($7.2m) a year earlier. This increase in bonuses, in the context of the FCA fine and COVID loan issues, is likely to raise questions about the bank’s internal governance and priorities.

However, Chief executive Raman Bhatia explained: “In the last year we demonstrated our commitment to addressing legacy matters, investing in our people and capabilities so we now move forward from a position of strength.

“We will leverage our robust capital position to continue to scale our growth in the UK by helping our customers become better with money.

“We will also make great strides in turning Engine by Starling into a global success.”

Customer growth

On a more positive note, Starling’s annual report highlights continued growth in customer numbers, reaching 4.6 million open accounts. Revenue also saw an increase, rising to £714m ($967.5) from £682m ($924) in the previous year, with customer deposits topping £12 billion ($16.3 billion). The bank emphasized its fourth consecutive year of profitability, albeit at a reduced level.

Bhatia, in a note within the annual report, highlighted the bank’s commitment to “remaining best-in-class at meeting the needs of our customers” and continued innovation, such as the launch of its Easy Saver account and the use of AI to enhance customer service and combat fraud. The bank’s software-as-a-service (SaaS) subsidiary, Engine, also showed significant growth, with revenue increasing by 284% year-on-year to £8.7m ($11.8m), with ambitious plans for expansion into the US market.

The 2025 annual report paints a picture of a bank in a transitional phase, navigating past compliance failures and legacy issues while striving for continued growth and innovation in the competitive digital banking landscape.