‘Challenger Banks’ – Why Are Consumers Switching?

However, in recent years, the dominance of the leading banking groups has been challenged by new, smaller companies aiming for a market share. As of January 2021, 14 million people in the UK have opened an account with a mobile bank. This is expected to almost double over the next five years, according to research.

These new 'challenger banks' have offered an alternative service for customers looking away from the traditional high-street banks. So, what is driving consumers to them and why are ‘challenger banks’ proving so successful?

• The Emergence Of 'Challenger Banks'
• The Embracement of Technology
• The Advantages & Disadvantages of 'Challenger Banks'

 The Emergence Of 'Challenger Banks'

When Metro Bank was issued a banking licence in 2010, it was the first to receive one in a hundred years. Before the 2008 financial crash, the process to open a bank was difficult and expensive. But with regulations changing in the wake of the global financial crisis, the decision to open the market to allow for new banks and services paved the way for change and a more diverse financial market. This year, Metro Bank increased to 2.4 million account holders and was one of the larger full-service banks with its ambition to become the UK’s best community bank with its mix of high street branches and online banking.

Virgin Money (from Northern Rock) and TSB (from Lloyds Banking Group) emerged from divestments from larger banks. At the same time, retailers such as Sainsbury’s and Tesco have all challenged traditional high-street banks with specialised banking. Sainsbury’s bank currently has 2 million customers, and Tesco Bank has a total income of £822.9 million.

While these more well-known companies and financial services have made an impact, the emergence of online only banks has led to further opportunities and the potential for even further change.

The Embracement of Technology

New 'challenger banks' have no physical branches and operate entirely online through web-based apps thanks to digital processes and the latest technological advancements. The introduction of the second Payment Services Directive (PSD2) regulation in 2017, which makes payments safer and more secure, aiming to improve consumer protection and drive down costs of payment services, opened the door to give consumers more choice on how they manage their payments and bank accounts.

The FCA said, “competition in retail banking and payments is vital to UK consumers and the wider economy; PSD2 builds on this.” The mixture of PSD2 and improved digital processes has meant many new opportunities. With almost 1.7 billion adults worldwide not currently using a bank account, 'challenger banks' have a unique position in the market.

The UK is currently home to ten challenger banks as of August 2021, with London one of the epicentres of the FinTech (Financial Technology) revolution. Many of the challenger mobile banks offer their services through their downloadable app and provide their customers with easy banking. Last year 1 in 4 British adults had a digital only account, signifying a 16% increase over 12 months. It’s thought that by the end of 2025, 23.2 million UK adults will have a mobile only bank account, with 14% of UK adults planning to open one in the next year.

Offering convenience through their apps makes adopting one of the new eras of 'challenger banks' much more attractive. As many as 41% of UK adults gave this as the main reason they switched to digital-only banks. It’s not only the convenience and design of the app, of course, as many using an online only bank find it comes with other benefits that make them a 'challenger'.

Real-time payment notifications are one such benefit, where a customer is alerted every time there is some activity on the account, making tracking such changes much more accessible. Also, they offer much more personalisation for the user for a streamlined customer experience and low fees and interest rates.

Starling Bank automatically categorised an account holder’s spending into food, travel, entertainment, bills etc. It was the first branchless bank to offer interest on current account balances, with instant notifications for any activities and no fee for overseas spending.

Monzo, who currently have 3.9 million current account holders, started life as a prepaid current account with its contactless MasterCard linked to its app. It continues to evolve offering benefits such as no fees overseas, instant notifications, faster payment clearing and even the option to have your salary paid a day early thanks to processing BACs payments earlier.

The Advantages & Disadvantages of 'Challenger Banks'

Whilst offering convenience and lower fees, the competition between 'challenger banks' and the traditional banks has intensified, with Fintech revolutionising the trend. Building so-called 'super apps' that combine multiple actions for customers is a driver of this, with traditional banks all having their own existing mobile banking apps improved to compete with the new start-ups.

The need for conventional banks to innovate is essential as switching bank accounts has become easier for consumers, and they don’t want to be left behind by customers going for the latest start-ups. One of the disadvantages that may come with open banking is that of opening up customer data. Some start-ups may look to increase revenues by monetising consumer data and spending behaviours.

Where 'challenger banks' will be creative in attracting customers away from traditional banks by offering lower fees, quicker set-up and transparency, cleaner user interfaces and more innovative processes, they can’t provide everything to everyone. Some customers will still yearn for a physical branch to speak to someone. If you want all your banking products in one place, many specialise in certain banking products whilst not being able to offer everything such as mortgages and credit cards under one roof.

Depending on what consumers are motivated by when looking at options, there are pros and cons of switching to online-only banks. Regulations will be further adapted around concerns over data privacy whilst the growth of 'challenger banks' continues. In 2020, Revolut was the fastest growing bank in Europe, registering six million users more than in 2019, equating to a lot of customer data.

For customers unsure of switching, it’s always best to check the provider is regulated by the Financial Conduct Authority (FCA) as they will need to hold this licence. The European Securities and Markets Authority (ESMA) also have created forums to address any vulnerabilities insecurity due to the rapid rise of third-party integration through 'challenger banks', which will be a constant into the future. Consumer confidence will be vital in maintaining this rapid growth, and time will tell just how many more will make the switch.

Conclusion

As with any financial product, take your time to research, understand and then compare to find the best UK online bank for your needs. For more information, check out our guide on all you need to know about online-only banks accounts.