In the last few years, the Canadian banking landscape has changed dramatically, to the point where it can be confusing to navigate. There are not only many more banks to choose from but also many different types of bank. Click on a challenger bank name below to read our review and find out more.
A challenger bank, or a neobank, is a completely digital banking provider that doesn’t use any existing legacy systems to operate. Unlike regular online banks, this means that challenger bank don’t use any physical infrastructure or digital operating systems that are already being used by existing financial institutions. The technology used by these fully digital banking providers is developed from scratch. They get their name from their roles as challengers to traditional banks like the big 5 banks in Canada.
A challenger bank is one that’s smaller and newer than a traditional bank. By newer, we mean that most challenger banks were founded after 2009 – after the 2008 global financial crisis – and the vast majority began after 2014.
Challenger banks hope to win over customers from the big banks. Their plan to compete is by offering cheaper deals, more flexibility, better service or all of the above.
In a nutshell, challenger banks are trying to squeeze into the market and take opportunities that mainstream banks have been neglecting because of their size, relative market dominance and older technology systems.
What’s in a name?
These three terms are often used as synonyms and usually refer to the same group of companies. However, there are some distinctions to make:
Challengers. It’s a general word that refers to the idea that these companies are “challenging” traditional banks and their power in the market. Not all challengers are banks. Companies like KOHO, for example, provide services to help you save and spend your money in non-traditional ways.
Challenger banks. Challengers and digital banking apps are only entitled to call themselves a “bank” if they have a full banking licence, such as Monzo and N26.
Digital banking (apps). Challenger banks are usually digital-only, but there are exceptions. The term “digital banking apps” also encompasses budgeting apps such as Mint or Emma, which don’t actually hold any funds, but use Open Banking to connect to your current account and help you manage your finances.
Challenger bank advantages
It’s important to understand that just because a bank calls itself a “challenger” it doesn’t mean that it’s necessarily better for the consumer. It is true, however, that challenger banks usually bring some advantages.
Challenger banks are hungry for customers. A challenger bank doesn’t have a long list of established customers that have had an account for years, if not generations. So, it has to get creative. This usually translates to lower fees, a quicker set-up and more transparency.
They’re techy. One of the biggest complaints leveled at traditional banks is that they struggle to keep up with technology. For example, the big banks have been slow in coming up with efficient and user-friendly banking apps. Challengers usually excel when it comes to user experience since they’ve built their systems with newer tech, from scratch.
They’re smart. Traditional banks often mean loads of letters, queues and bureaucracy. Simply opening an account can be a time-consuming process. Challengers usually cut down on that process, typically allowing you to register online or on your phone in just a few minutes, sometimes without proof of address.
Traditional banks are now starting to catch up on all of this, which is living proof that more competition means better service for consumers across the whole market.
Challenger bank disadvantages
So, is it all roses with challenger banks? Well, not necessarily. It really depends on your banking needs and preferences. While challenger banks bring many advantages, there are also some notable disadvantages.
They lack a physical presence. Don’t forget that if you pick an online-only bank, you won’t be able to just pop into a branch and speak to a member of staff. You’ll have to figure out many things by yourself.
They tend to specialize. If you bank with one of the big traditional banks, you can get current accounts, credit cards, mortgages, loans and savings accounts all with the same bank. This is generally not the case with challenger banks. Most of them only offer a very limited number of specific services, although they’re gradually expanding their product ranges.
They aren’t great for cash. If you mostly rely on cash, using a bank that doesn’t have physical branches is likely to be a headache.
Overseas banks that come to Canada aren’t always able to offer the same features to Canadian users because of regulation. In some cases the bank will roll out new features as it expands, but not always. Banking regulations vary from country to country, making it difficult to offer the same features in every country.
Are challenger banks online only?
Most challenger banks don’t have physical branches and operate completely digitally, which allows them to save money and offer better deals. This is true for some of the best challenger banks, such as Monzo and N26. If you bank with either of these, you can do everything through a mobile app.
However, digital challengers are coming up with new ways of establishing their physical presence across the globe. In certain countries, for example, some challenger banks allow you to deposit cash into your digital account at post office branches.
How to compare challenger banks
The trick to comparing challenger banks – or any personal finance service – is to know your needs and habits. There is no one bank that’s the best fit for everyone. Set your priorities, think about what you want to get out of your bank account and only then compare your options. We’ve put together a list of questions you can ask yourself to kick-start your research.
Which product are you looking for? Are you looking for a current account for day-to-day banking, a savings account or a loan? Challengers tend to specialize, so first, you may have to figure out which one offers the services you need.
Do you use a lot of cash? Some challengers have limits on ATM withdrawals, and not all of them allow cash loading.
Do you travel abroad much? This is a strong point for many challengers. Some allow you to use your card abroad without any foreign currency exchange fees at all.
Do you need immediate access to your money? If saving money is your main goal, you’ll want to compare interest rates, but also access. Does that juicy annual rate mean that you can’t get your money back before the product expires? (Spoiler alert: usually, yes.)
Once you know all this, you can then compare fees, rates and products knowing exactly what your priorities are to help find the best challenger bank for you. Don’t forget to look at what traditional banks offer as well – they may surprise you.
Are challenger banks safe?
It obviously depends on the bank. The first thing to do is to check that the provider you’re looking at is actually a bank. That is to say, whether it has a full banking licence or not. If it does, your deposits will be protected up to dollar limit of the insuring body of whatever country the bank is registered in.
If the provider isn’t a bank, it doesn’t mean your money isn’t safe, but it does mean that the level of protection isn’t the same. Always make sure that the provider is regulated or has a license to issue electronic funds.
Challenger banks know that security is a big concern for their customers, so they usually take great care to ensure that customer data is safe and that apps and cards are well protected. However, if you are going for a digital-only account, it’s good practice to be aware in advance of what happens if you lose your card (can you block it or cancel it directly from the app?) or, more importantly, your phone (would someone be able to access your banking app and your money?).
The Digital Banking Umbrella
Digital banking is an umbrella term that includes everything from online banking with traditional banks, to mobile banking and challenger banks.
Charlie Barton is a publisher at Finder. He specialises in banking and investments products, including banking apps, current accounts, share-dealing platforms and stocks and shares ISAs. Charlie has a first-class degree from the London School of Economics, and in his spare time enjoys long walks on the beach.
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