What are challenger banks?

Challenger banks are a hot topic in UK personal finance. But what are they?

In the last few years, the British 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.

Challenger banks: A definition

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 – so after the 2008 global financial crisis – and the vast majority began after 2014.

Their plan is to compete with big banks such as HSBC, Lloyds, Barclays and RBS. By offering cheaper deals, more flexibility, better service or all of the above, challenger banks hope to win over customers.

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.

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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 levelled 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 typically lack a physical presence. Don’t forget that if you pick a digital-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 specialise. If you bank with one of the big 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 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.

Are challenger banks digital-only?

Many challenger banks don’t have physical branches, which allows them to save money and offer better deals. This is true for some of the most well-known challenger banks, such as Monzo and Starling Bank. If you bank with either of these, you can do everything through a mobile app.

However, there are exceptions. Metro Bank, for example, launched in 2010 as a high-street challenger dedicated to better customer service, and now has 66 branches across England that stay open up to 12 hours a day.

Finally, digital challengers are coming up with new ways of establishing their physical presence across the UK. Starling, for example, allows 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 specialise, 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. 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 £85,000, just as they are in a high-street bank, thanks to the Financial Services Compensation Scheme (FSCS).

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 by the Financial Conduct Authority (FCA). Many challengers hold an FCA licence to issue electronic money.

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?).

Compare digital and challenger banks

Updated June 16th, 2019
Name Product Fees and charges Delivery speed
N26
Free
5-7 working days
App-based bank account that can be used on the go in any EU country. All about the ease of sending and saving money.
Free with finder.com, otherwise card delivery is £4.99
Up to 9 working days
App-based current account with loads of extra features. (e.g. Real time transactions, payment categorisation, save spare change, free international money transfers, buy cryptocurrency)
Free
Between 3-5 working days
Everything you get from a current account, but with new features for mobile living. (E.g. Goals for saving, spending catgorisation, interest on your balances)
None
Between 3-5 business days
A multi-currency mobile banking app that aims to be ‘built around you’. Use it to open a fully functional current account instantly, straight from your phone, all supported by a feature-rich mobile app

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Updated June 16th, 2019
Name Product Foreign ATM withdrawals Foreign transactions fee Card cost Delivery speed
N26
ATM fees differ depending on country
No fees
Free
5-7 working days
App-based bank account that can be used on the go in any EU country. All about the ease of sending and saving money.
No ATM fees
No fees
Free with finder.com, otherwise card delivery is £4.99
Up to 9 working days
App-based current account with loads of extra features. (e.g. Real time transactions, payment categorisation, save spare change, free international money transfers, buy cryptocurrency)
No ATM fees up to £300 a day.
No fees
Free
Between 3-5 working days
Everything you get from a current account, but with new features for mobile living. (E.g. Goals for saving, spending catgorisation, interest on your balances)
€1 per withdrawal
2% on card spend and ATM usage
Card delivery is free
Between 3-5 business days
A multi-currency mobile banking app that aims to be ‘built around you’. Use it to open a fully functional current account instantly, straight from your phone, all supported by a feature-rich mobile app

Compare up to 4 providers

Updated June 16th, 2019
Name Product Fees and charges Interest Savings goals
N26
Free
None
n26 'Spaces' feature lets the user open sub-accounts to stash your money away
Free with finder.com, otherwise card delivery is £4.99
No interest
Set budgets in the app
Free
0.5% AER up to £2,000, 0.25% over £2,000 to £85,000
Create different spending goals and protect money from daily spending
None
No interest
Not a feature

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Updated June 16th, 2019
Name Product Direct debits UK ATMs Payments Freeze your card
N26
Yes
Free
Use MoneyBeam to transfer money instantly. Is partnered with Transferwise so can send money to 16 countries.
Yes: touch of a button in app
App-based bank account that can be used on the go in any EU country. All about the ease of sending and saving money.
Revolut currently only supports direct debits with the Euro IBAN account
Free up to £200 a month
Easy UK payments and can transfer money between 23 countries
Yes: touch of a button in app
App-based current account with loads of extra features. (e.g. Real time transactions, payment categorisation, save spare change, free international money transfers, buy cryptocurrency)
Yes - future Direct Debits shown as alerts
Free, limited to £300 a day
Pay via bank transfer or using PayPal or Google Nearby
Yes: touch of a button in app
Everything you get from a current account, but with new features for mobile living. (E.g. Goals for saving, spending catgorisation, interest on your balances)
Yes - can cancel with touch of a button too
£1 per withdrawal
Pay via bank transfer, easier to send to another Monese account.
Report lost/stolen in app to be sent replacement
A multi-currency mobile banking app that aims to be ‘built around you’. Use it to open a fully functional current account instantly, straight from your phone, all supported by a feature-rich mobile app

Compare up to 4 providers

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