Challenger bank accounts 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.
Compare Challenger Banks & Costs
Challenger Bank | Customer Revies | Account Fees | ATM Withdrawals (UK) | ATM Withdrawals (Overseas) | Foreign Transactions | Overdrafts | Interest on Balances |
---|---|---|---|---|---|---|---|
Starling Bank | No monthly fees | Free, up to £300/day | Free, up to £300/day | No fees for spending abroad | 15%, 25%, or 35% EAR | 3.25% AER (up to £5,000) | |
Monzo | No monthly fees | Free up to £400 every 30 days; 3% thereafter | Free up to £200 every 30 days; 3% thereafter | No fees for spending abroad | 19%, 29%, or 39% EAR | Partnered savings up to 4.10% AER | |
Atom Bank | No current accounts, focuses on savings | N/A | N/A | N/A | N/A | Competitive fixed-term savings rates | |
Monese | No monthly fees | Free up to £200/month; 2% thereafter | Free up to £200/month; 2% thereafter | Free spending up to £2,000/month; 2% thereafter | Not offered | Not offered | |
Metro Bank | No monthly fees for personal accounts | Free up to £300/day | Free withdrawals in Europe; £1.50 fee outside Europe | No fees for spending abroad in Europe; 2.99% outside Europe | 15%-35% EAR | N/A |
Pros and cons of challenger banks
Pros
- 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.
Cons
- 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.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
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