FinTech definitions: what is a challenger bank?

Challenger banks are receiving a lot of attention in the financial sector for their excellent service and innovative approaches, but what are they?

Popularly considered to be small-medium retail operations set up with the purpose of competing against other, larger and more established banking institutions, challenger banks are heralding an exciting era in finance for customers. 

Although not restricted just to the UK, challenger banks have found its financial climate fertile ground for innovation, with some of the most noteworthy global examples originating there.

Originating in the wake of the 2008 financial crisis, regulators began encouraging more market competition in order to mitigate the fixed concentration of power held by the UK’s largest institutions.

What makes challenger banks different?

Perhaps the most striking difference between these and traditional banks is their focus on digital technology and online customer experience. Although these aspects have started to gain momentum generally in recent times, challenger banks have often been the conceptual pioneers.

Customers can often enjoy a more diverse range of products and services to suit their needs, as well as better interest rates than comparable offerings from the high-street.

Moneyfacts found in its comparison that challenger banks had a 0.66% higher average AER on a one-year fixed-rate bond. The same survey also recorded challenger banks as offering 11 more products than traditional banks (36 vs 25).

Despite being a generally all-inclusive term, challenger banks can be broken down into subcategories:

• Digital: These are entirely online organisations with no physical branches (Monzo and Startling Bank)
• Commercial lenders (Shawbrook Bank and One Savings Bank)
• Challengers banks which maintain a high-street presence (Virgin Money and Metro Bank) 

As customers become accustomed to the easy convenience of digital banking and less reliant on ATMs and physical branches, traditional banks may find that they need to collaborate with tech innovators to remain competitive.

In the meantime, challenger banks will continue to introduce much-needed diversity into the finance sector, elevate the online customer experience and offer services which only the most agile enterprises can develop.

For further reading, a full list of challenger banks can be found here.