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A Guide to Challenger Banks

Financial services continue to reconfigure and evolve at a rapid rate; at times it can feel hard to keep up. The fallout from the global financial crisis changed the face of consumer behaviour forever, and a new wave of challenger banks have emerged as a result. In this guide, we examine the growing popularity of these alternative banking services, what they do differently and how they compare to the traditional institutions.

Updated: 05/10/2021
Read time: 6 minutes

What is a “Challenger Bank”? 

The term “challenger bank” typically refers to the new generation of smaller banks who are challenging the larger incumbents for market shares. Also referred to as digital first, digital only and neobanks, these companies are relatively smaller than the leading national banks. In the UK, the “Big 4” national banks are Barclays, HSBC, Lloyds and the Royal Bank of Scotland, and in the US, JPMorgan, Chase, Bank of America, Wells Fargo and Citigroup dominate the market. 

New challenger banks compete for business by specialising in areas underserved by the “big banks.” An example of one pioneering challenger is Metro Bank, which began competing against the UK’s long-standing incumbents back in 2010, by offering their services 7 days a week.

Challenger banks form as a result of several circumstances: the divestment of larger banking groups, the reimagining of a failed corporation or as an entirely new entity altogether. Regardless of the conditions, every new bank must follow the same rules and regulations as all other authorised banks. 

The rise of challenger banks: how did they become so popular? 

Entrepreneurs in the financial services sector started to notice a shift in the consumer banking landscape – millennials stopped trusting “big banks” following the fallout from the global financial crisis – and a gap in the market began to form. Responding to this, a number of finance professionals decided to launch intelligent, alternative digital services. Having identified the need for simplistic, transparent and convenient functionality, with special emphasis on customer experience, these challenger banks acquired the dissatisfied customers of bigger banks.

The name “challenger banks” derives from their propensity to challenge the status quo and tendency to ask the pressing questions: How can we shake things up?  What works best for customers? How can we make banking easier? Striving to provide a service that is better in some way than the traditional offerings. 

We have seen a sharp increase in the number of challenger banks entering the market in the last five years. These companies offer customers redefined financial services, focused primarily on the mobile banking experience. From paying for goods and services by tapping your smartphone, to sending money to friends and family, modern banking is marketed towards digital convenience. Challenger banks are doing everything they can to tailor their services to the digital requirements of new customers, with a real focus on elevated user experience. 

Challenger banks pride themselves on being transparent; but are they as trust-worthy as conventional, long-standing banking institutions? 

Are challenger banks safe and secure?

In order to trade, challenger banks must be licensed and regulated by the relevant financial authority in the country they conduct business in. The same laws and regulations apply to challenger banks as traditional banks, however, not all of them are serviced by compensation schemes. 

Furthermore, start-ups are known for being at greater risk of failing, so it is important to know whether your money will receive direct protection by the relevant regulators. There have been a few examples of challenger bank start-ups who were not covered by financial regulators and therefore could not protect their customers when the company was forced into administration. Most current challenger banks comply with the requirements of financial authorities, but be sure to read the fine print before setting up an account. 

Different types of challenger banks

Digital challenger banks

Unlike the traditional banks who still pay for high street stores, online-only challenger banks such as Monzo and Revolut are able to keep their costs down. This form of cost-cutting means challenger banks are able to offer more favourable interest rates, a hugely enticing factor for anyone looking for a better value bank account. Other popular digital challenger banks include Starling, N26, NuBank, Tide and Empower Finance: all of whom offer their services exclusively via digital channels. 

Mature challenger banks

The phrase “challenger bank” predominately refers to newly incorporated movers and shakers, so it is worth noting some alternative banks have been challenging the market for more than a decade. Not all challenger banks offer online-only services. Several of the more mature brands have physical branches, like the UK’s Metro Bank (founded in 2010) and TSB (launched in 2013), These mature challenger banks have paved the way for their digital-only counterparts. 

Challenger bankers: understanding the pros and cons

In this next section we will compare the pros and cons of banking with an alternative challenger provider:

Quick and convenient customer service: users are able to freeze accounts, replace lost or stolen cards and set up new accounts through mobile apps; no need to make a trip to the bank
Travel perks: Customers often benefit from international money perks such as free ATM withdrawals abroad, low or zero fees and mid-market rate FX
Personalised features: digital bank features include tracking spending habits, spending reports, spare change round-ups, assistance with saving goals
Prepaid debit cards and diverse types of account are available
Higher rates of interest on savings and other accounts
Instant alerts: Most challenger banks offer real-time payment notifications which can provide details of transactions, including location
Tough competition: Pressure to offer more traditional services, such as mortgages and loans, to generate more revenue and keep up with the big banks
Big bank acquisition: The bigger banks may attempt to take over or combine services with challenger banks, in a bid to obtain more market share
Start-up uncertainty: moving your hard-earned money, and savings, to a newly incorporated bank runs the risk of losing the protection and financial strength of bigger banks
Digital-only: Not all challenger banks have physical branches for those who still prefer dealing with financial matters face to face.
Third party data: The success of a challenger bank sometimes relies on sharing customer data with third party partners who review your spending patterns

It seems there are almost an equal amount of advantages and disadvantages when banking with a challenger service. However, most the disadvantages listed above derive from the unknown. While it strongly depends on your requirements and preferences as a customer, those who are happy to revert to a fully digital banking experience would definitely get a great deal out of a challenger bank account.

With plenty of functions to help create a more personalised and convenient user experience, leading challenger banks offer customers elevated elements of a traditional bank account.


It is fair to say we can expect more challenger banks to hit the market in coming years. As the majority of banking services continue to move online, with popular customer preferences focused on online and smartphone accessibility, financial incumbents are being forced to close the doors of their physical branches. Since the COVID-19 pandemic, over a third of bank branches have closed in the UK alone. Global banking giants HSBC have reported that 90% of customer contact is conducted using smartphones with services primarily delivered online. As a result, 82 HSBC branches are due to close in the UK in 2021, and it is likely a lot of other institutions will follow suit.  

With this in mind, it is important to stay up to date with challenger banks and their various offerings. MoneyTransfers will always be there to guide you through unknown territory, providing all the need-to-know information about market leaders and fine tuning our comparison tool to ensure we are helping you find the best services.

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April Summers

April is a journalist and full-time content writer for MoneyTransfers.com. Over the last decade she has written for a number of different online and print publications. Having lived overseas in Canada and Vietnam, April hopes to see more of the world as soon as possible, with Japan at the top of her travel list. As a former expat, April has first-hand experience of managing finances from overseas. She enjoys writing about forex trends and the future of banking.

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