Would you make the switch to a challenger bank?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
25th October 2021
7 minute read
The consumer banking industry has made a monumental shift in the last 10 years, mainly because there is a lot more competition in the market. This has come from digital-only challenger banks who have swooped in and offered instant access to accounts, intuitive apps, exclusive perks and useful budgeting tools to help customers take control of their money. We’re talking Monzo, Starling, Revolut, N26 and many more besides.
However, whilst challenger banks have made significant inroads into the market, there is still a reluctance with customers making the switch away from trustworthy high street banks.
The Money Guru squad (and the big G himself) have done some research into how each challenger bank is performing and our predictions on the future of digital-only banking. Read on to find out what we discovered about app-based challengers!
What is a challenger bank?
- Challengers are new digital-only banks
- Relatively new in the market
- Only available via a smartphone app
- No branches but plenty of support online
A challenger bank refers to a new bank set up since the Global Financial Crisis of 2008 and is more often than not a digital-only bank. They will usually offer a small range of credit products for personal and business use, including current accounts, credit cards, loans, mortgages and savings to name a few.
They are usually very new to the market compared to high street banks and instead of having branches you can visit, provide an intuitive smartphone app so you can access your account at any time. Examples of challenger banks include Monzo, Starling, N26, Revolut, Monese, Cashplus, Tandem and Atom amongst many others.
Whilst being known as challenger banks, they are also referred to as neo-banks, disrupter banks or app-based banks by customers.
History of the challenger bank
After the financial crisis of 2008 the decision was made to allow new banks to enter the market, as part of the Financial Services Act of 2012. The Bank of England also set up their New Bank Start-up Unit to assist challengers to get set up.
In actual fact, the so-called ‘original’ challenger bank was Metro Bank, who received their banking licence in 2010, the first new bank to receive one in over 100 years. Since then, a flurry of new challenger banks have emerged, disrupting the hold that the big four banks (Barclays, HSBC, Lloyds and RBS) had on the marketplace.
They can be separated into established challengers, who have been in existence since 2008, and modern challengers, who have only come into existence within the last few years. Whilst many established challengers have been created from existing brands such as Tesco and the Co-operative, modern challengers are completely new brands that have received external funding. You can see the list below:
- Metro Bank
- Co-operative Bank
- Virgin Money
- Bank of Ireland
- Aldermore Bank
- Tesco Bank
- Sainsbury’s Bank
- Starling Bank
Of course, many of these established challengers have grown from other retail entities and even supermarkets. This has given them a jumpstart in the marketplace, whilst more recent challenger banks have been built from the ground-up with external investment helping to fast-track their growth.
Whilst their market share is still small compared to some of the well-established high street banks, they are rapidly gathering a loyal customer base and also getting recognised for outstanding customer satisfaction.
Find out more about modern challenger banks in our Challenger Bank Review here.
How do people feel about challenger banks? Do they trust them?
We recently conducted a survey to find out how people felt about challenger banks in general and whether they would consider switching from their current bank.
This allowed us to get a snapshot of how people felt about challengers, specifically the up-and-coming modern challengers who might not be considered as trustworthy as established challengers or high street banks.
As part of our survey, we asked 2 questions:
- Are you currently with a high street bank?
- How likely would you be to switch to a challenger bank?
Have a look at the final results and additional details that we discovered through performing the survey.
Are you currently with a high street bank?
- Yes – 70.3%
- No – I’m with a challenger bank – 3.5%
- I have an account with both – 3.6%
- I don’t have a current account – 22.6%
How likely would you be to switch to a challenger bank?
- I’m already with a challenger bank – 2.5%
- Already looking – 2.0%
- Very likely – 1.3%
- Quite Likely – 2.2%
- Not looking – 92.1%
These final results indicate that the majority of respondents are still with a high street bank, though there are a small number either with a challenger bank, have an account with both or are actively looking.
This reveals what is currently well-known, in that the more established banks have the lion’s share of customers while challengers are just beginning to scratch the surface. Having an account with both is often the default for new customers of challenger banks as there is no pressure to switch everything over.
The challenge for challengers (excuse the pun) is getting customers to switch over and have the challenger account as their main bank account, rather than just dipping in and out and keeping their old high street current account.
A few other interesting stats were revealed through our survey:
- More men than women have an account with both a high street and a challenger (56.2% of men surveyed compared to 43.8% of women)
- Those aged between 35-44 made up the majority of those who said they are currently with a challenger bank already (41.1%) compared to 18-24-year-olds (26.4%)
- Those aged between 18-24 made up the majority of those who said they have an account with both a high street bank and a challenger bank (55.1%)
- More men than women are already with a challenger bank based on the people we surveyed (57.6% compared to 42.4%)
- Those aged between 35-44 made up the majority of those who said they are already looking for a switch to a challenger bank (53.5%)
Are challenger banks performing well?
At the time of writing (Late 2019), it is reported that challenger banks have a combined customer base of 13 million and are set to triple that within the next year. This figure, reported by Computer Weekly and Accenture, would surely indicate that they are on the cusp of making a massive impact in the UK market.
However, the statistic that remains elusive is the percentage of challenger bank customers that use the account as their primary account. That is to say, those who deposit their wages into the account and use it to pay the majority of their bills. The current trend is customers opening a challenger bank account as a secondary account to their existing high street bank account. This means that despite soaring numbers, there is still the question of whether challengers are making money off
An article from the Financial Times in September 2019 indicated that despite this growth in customers, the established and modern challenger banks are still struggling against the big four banks. The article blames the Bank of England for creating stringent rules that challenger banks need to abide by, which are hampering their growth. It also elaborates on wider issues, saying that individual banks such as CYBG and Metro have had individual setbacks that have forced regulators to step in.
It could be surmised that challenger banks, especially modern ones such as Monzo, Starling, Revolut and N26, have had a rapid rise in customers, especially in 2019. This growth is set to continue into 2020 with more and more people either considering a switch, or just to open a new account with a challenger.
What next for challenger banks?
A report from This Is Money and Apptopia has revealed that Monzo are now taking up more than 50% of the market share controlled by challenger banks. This leaves Revolut, Starling and N26 occupying smaller percentages between them.
This success could be attributed to successful branding and marketing, attractive features or even a better switch incentive than other banks. Most modern challengers have offered at least a small cash bonus for opening an account, giving rise to the rapid influx of customers. However, many have now scrapped their initial cash bonuses and have turned instead to promoting their features instead.
In order to make the leap to having customers using a challenger bank as their primary account, it’s important to come up with features that will attract interest from customers and convince them that this is the right choice for them.
Monzo is seemingly leading the way with their strategy of ‘Get paid early’, meaning that as a reward for depositing your monthly salary into your Monzo account, you will get access to your wages 24 hours early. This might seem like a thin gesture, but ultimately it will earmark Monzo as offering something completely unique compared to other challengers.
Starling has now branched out to TV advertising to increase brand awareness, coupled with one of the best app experiences available for challenger customers. N26 has started to offer various colours of their card through N26 You, while Revolut is pushing to be the top challenger in Europe with a focus on the best exchange rates and a free Euro IBAN account.
The next crucial step will be for challengers to consolidate their existing customers by encouraging loyalty and trust, so that they can be retained as active customers who consider their challenger bank account to be their primary account.
A few are actively trying to do this, while most are simply strengthening their position and improving their features to seem better or on par with the big four UK banks.
Ultimately, even though established challenger banks have had almost a decade to grow, they will always struggle against banks that have been in existence for a century or more. The continual growth of challengers will rely upon them offering unique features, useful perks and benefits more attuned to customers’ needs and switch incentives that will seem like a no-brainer to customers young and old.
Are you thinking of making the switch to a challenger bank? Head over to our Current Accounts hub to find out more about switching, or go straight to our current account tables to see which accounts we have available. Good luck!