What are Challenger banks?
Challenger banks are newer, smaller entrants to the financial markets which compete directly with established banks. They often do this by playing to their strengths as a smaller organisation and offering a specialism which has been underserved by the big banks.
For as long as anyone can remember, banking has been something of a closed shop. Despite a few name changes and mergers, the market has been dominated by the same names for decades. Now, though, a new generation are taking the fight to the big boys and not all of them are that happen.
They are the challenger banks and, if you’re unhappy with service you’ve had from your bank, they could offer an interesting alternative.
Where incumbents are large and cumbersome, they can be quick and agile, innovating more quickly and providing a customer focuses service which is often lacking among larger banks.
Their secret sauce is digital. Although some, such as Metro Bank, have branches, most are digital only operations delivering banking services via online platforms and mobile apps. Without the costs of maintaining costly bricks & mortar branches, they can often deliver better value services to customers. Indeed, they often highlight their more sustainable, customer first approach as being a key point of differentiation against their established competitors.
Challenger Bank Reviews
In our challenger bank reviews we compare account types, account fees, foreign exchange costs for spending abroad and highlight key perks and switching offers.
- Account types – Personal account, Euro account, joint account, Starling Kite account for children, Teen account and business banking.
- Fees – Personal account is fee free, Euro account has no monthly fee, Starling Kite account has £2 monthly fee. There is no fee for having an arranged overfraft but they will charge interest.
- Foreign spending fees – No fees forf using your card overseas, but you may be charged by your ATM provider. Card payments are converted into GBP at the Mastarcard rate.
- Perks – Fee free spending abroad, desktop version of the app for PCs.
- Switching Offer – Hassle free switching online.
- Account types – Current account, Plus Account, Joint Accounts, 16-17 accounts, Business Account, Premium Account
- Fees – Plus account: £5 per month, Premium Account, £15 per month, Business Pro £5 per month
- Foreign spending fees – Spending is free in shops and restaurants around the world. Withdrawals from an EEA country are free from an ATM. For other countries the first £200 every 30 days are free after which a 3% fee applies.
- Perks – Cashback for switching energy providers, no transaction fees, premium accounts have higher foreign spending limits.
- Switching Offer – Monzo offers a hassle free seven day switching service
- Account types – Instant savings account, Fixed saver account.
- Fees – No charges for opening an account or withdrawing money.
- Foreign spending fees – N/A
- Perks – 0.35% interest on instant saver account. 0.15% on fixed saver.
- Switching Offer – Atom bank offers a useful savings account to add to an existing current account.
- Account types – A standard current account, premium, a metal current account and business bank account.
- Fees – Standard account, free. Premium account, £2.99 per month Metal, £12.99 per month or £120 per year.
- Foreign spending fees – Prepaid currency account to make payments fee free using the interbank rate. Customers can withdraw £200 per month free or five withdrawals (whichever comes first) after which a 2% fee applies.
- Perks – The metal current account offers a striking metal card. Discounts available on certain brands.
- Switching Offer – Must be a Revolut customer with no outstanding obligations on the account. Switching generally takes 13 business days.
- Account types – Three levels of instance account, joint accounts and a ‘pot’ savings account.
- Fees – Simple account, 0 fee. Classic account, £5.95 per month. Premium account £14.95 per month.
- Foreign spending fees – Spending allowances vary depending on your accoubt. Simple account offers up to £2000 fee free with up to £200 per month from an ATM beyond which a 2% fee applies. The Classic account has up to £9,000 spending free per month and £900 free through ATMs after which 2% applies. The Premium account has unlimited fee free spending.
- Perks – Budgeting tools, premium accounts have higher fee free spending limits.
- Switching Offer – Fast, simple account switching.
- Account types – A current account and a more basic cash account.
- Fees – Banking has no monthly fees
- Foreign spending fees – It’s free to use your debit card abroad within Europe. Outside of Europe you’ll be charged a 2.99% fee. ATM withdrawals outside Europe carry a 2.99% and a charge of £1.50
Perks Free transactions in Europe
- Switching Offer – Switching is hassle free and can happen in seven working days.
Pros and cons of challenger banks
- Better value: Without the need to pay for physical infrastructure challenger banks often pass the savings over to customers in the form of lower fees.
- They thrive with tech: Traditional banks have been slow to adapt to new technologies. Many have been used to doing things in a certain way with vast legacy systems which take a huge effort to overhaul. Challenger banks pinpointed technology as window of opportunity from the get-go. They understand it and use it much more effectively.
- More efficiency: Their command of all things digital often means that they can deliver services faster and more efficiency than the larger counterparts.
- Smaller size: While their small size is a benefit it can also be a weakness. Many of these banks are new to market and are still working their way to financial sustainability. That means the possibility of failure is higher. All challenger banks are subject to the FCA, with customer deposits being protected up to £85,000, but if you’re a business or a larger customer you may feel more secure going with someone more recognised.
- Lack of branches: Not everyone likes to do all their banking online. Sometimes having a physical branch to go to can be reassuring.
- They’re not all that different: While they set themselves up as a kinder alternative to traditional banks, you’ll still be subject to credit checks. So, if you’ve had credit problems in the past, they may not represent such a great alternative after all.
How safe is your money with a challenger bank?
Like all other financial institutions, challenger banks are regulated by the FCA. As such, all deposits are protected under the Financial Services Compensation Scheme. This ensures that, if the bank were to fold, your deposits will be protected up to a maximum of £85,000.
Theoretically this does give you exactly the same protections as a big bank. However, these newer players are less established than the major banks. They do not have the same track record, and many are still in the start up phase. This means they are more likely to fail than a longer established bank. If you have savings of more than £85,000 you may want to consider a safer home for your cash.
How do challenger banks make money?
Traditional banks make money in two ways:
- By charging fees such as for ATM withdrawals and late payment.
- By charging interest on credit.
Most Challenger banks offer no fee banking as a form of differentiation from the traditional market. Many are not large enough and do not have the necessary regulatory permissions to offer lending services, which means they have to get innovative.
Some of the most common options are:
- Premium services: By offering premium services such as insurance products, special features or accounts with higher interest rates, they can charge a fee for some customers.
- Marketplaces: Many challenger banks create marketplaces in which they offer services to customers. This may involve their own products and those of third parties who may pay a commission for business which comes through the platform.
- SME: Business banking traditionally attracts fees. However, small businesses are often underserved by the traditional banks. By adopting products which can cater to this market, they can find ways to drive revenue.
- Credit services: Those challenger banks which have been more successful and have gained banking licenses are offering products such as loans and mortgages.