What are challenger banks?

These are financial service companies that began in the last few years that are competing with the offering of traditional banks. Examples of challenger banks include Monzo, Starling, Atom. Examples of traditional banks include HSBC, NatWest, Lloyds Banking Group.

Challenger banks are often digital only, and some mobile only. They typically have excellent customer service and user experience. Their financial services offering tends to develop overtime, with first offering pre-paid debit cards, savings account and then current accounts. This is followed by lending products, such as overdrafts and credit cards.

What has enabled challenger banks to enter the market?

There was only 1 new bank in the UK in 150 years (Metro Bank in 2010). However, in the last few years since 2013 there have been over 10. This is due to:

1. Regulation

The UK regulator the Financial Conduct Authority (FCA) wanted to promote healthy competition in the market. This was due to the 2008 financial crisis and the fact the market was dominated by a few companies. To do this the FCA created an easier and cheaper way to acquire a banking license. Challenger banks can apply for a banking licence directly and are given a period of time to build the computer infrastructure.

The FCA also created another new method, which enables challengers to apply for an e-money licence. This is even quicker and cheaper, but only allows the challenger to use prepaid cards. Once the business has been built out the challenger can apply for a full banking licence.

2. Technology Improvements

IT cost has dramatically reduced, and now companies can purchase a core banking system relative to their customer size and increase as required. New technology also means that challenger banks can plug into existing banking services much easier, for example through Application Programming Interfaces (APIs) that enables a connection between computers or between computer programmes.

The challenger banks also do not suffer from the legacy systems present in the traditional banks, and are often better at leveraging their data than the traditional banks. There are also some challenger banks that are “invisible” and embed the financial services into their existing technology platforms, such as Amazon and Alibaba.

3. Customer expectations

Following the 2008 financial crisis there was a large decrease in the amount of trust in the traditional banks, and consumers were more open to alternatives. These new challenger banks do not suffer from the brush of being bailed out. They can stand out for creating an alternative and better banking experience for customers. Customer expectations are rising, and they don’t just compare one bank’s service with another banks, they compare it to all companies. This means there is demand for a better banking experience than challenger banks can offer. Traditional banks didn’t need to innovate and improve, as there was limited competition, now they are starting to try to match the user experience of challenger banks.

Should you move to a challenger?

Only 4% of people in the UK move their current account per year. This is despite the introduction of the current account 7 day switching service which guarantees to move your account within a week. This moves across all your direct debits, standing orders and existing payees automatically. It also redirects any payment sent to your old account to your new one for 18 months.

It can be worth switching current accounts to get a better deal, and it is worth considering challenger banks too. Challenger banks are regulated in the same way as traditional banks, and your money is protected up to £85,000 per provider by the Financial Services Compensation Scheme (FSCS). You can easily check this with a quick Google or check the FSCS baking brands official register.

Things to consider for both challenger and traditional banks include: