Threat or fad?

App-based challenger banks have been attracting a lot of attention, but how do they measure against more traditional institutions?
by Phil Thornton


Before the 2008 global financial crisis, most people opening a current account were likely to choose a bank familiar not just to their mum and dad, but possibly also to their great-great-great-great-great grandparents. But, in recent years, this has changed dramatically with the emergence of challenger banks and digital-only banks.

While there were a handful of these banks in 2010, FinTech Futures, a digital publishing platform for the worldwide fintech community, today identifies no fewer than 108 in the UK. Including the US, Canada, South Africa and Europe, the total rises to 245.

Here’s how the new age of banks are measuring up against their traditional counterparts.
TrustOne reason for the emergence of challenger banks was a fall in customers’ trust in the big banks. Back in 2013, a survey of 11,089 UK adults by YouGov and the University of Cambridge, called Public trust in banking, found almost three-quarters (73%) of respondents describe the reputation of banking as bad. This is the highest figure of the 26 sectors the researchers tested.
New technologyAt the heart of challenger banks’ businesses is mobile banking, which enables customers to carry out all their transactions on their phone. This was made possible by the development of 3G, 4G and now 5G technology. One recent innovation is the ability to pay in a cheque by photographing it on your phone. Contactless payments have enabled tech companies such as Google and Apple to offer virtual wallets.
User-friendlyWell-established challengers offer a range of user-friendly innovations. Monzo, for example, has launched a feature giving account holders the ability to gain access to their monthly salary a day early, while Starling features include payment notifications, instant card blocking and a perk that allows users to round up transactions to the nearest pound and put the change into a savings account. Revolut features include a group ‘vault’, which enables friends or family to pool their savings, and auto-exchange, which allows customers to automatically exchange money from one currency to another based on a target rate set by the user.
Younger usersDigital-only banks are gaining ground mainly, but not exclusively, among younger customers. According to a survey in 2018 of 2,000 18- to 65-year-old Britons – commissioned by Crealogix, which provides technology to the fintech sector – 44% had opened at least one new challenger bank account in the past five years, increasing to almost 80% of Generation Z, those born since 1996.
Raising fundsMore than US$2.8bn was raised by challengers between 2014 and early 2018, according to data provider FinTech Global. It says the average deal size grew from US$7.2m in 2014 to US$31.8m in 2018, as challenger banks require more capital to fund customer acquisition costs and to pursue banking licences. And figures from CB Insights from August 2019 show that challengers worldwide raised US$1.5bn in 44 deals in the first two quarters of 2019, with the year-end total set to easily surpass the previous record fundraising of US$2.25bn in 90 deals in 2018.
Market shareWhile sector watchers don’t doubt that new digital challenger banks will continue to come to the market, they are less willing to bet on their ability to significantly eat into the market share of the traditional players.

The full version of this article is published in the October 2019 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.

Once you have read the print edition, keep coming back to the digital edition of The Review, which is updated regularly with news, features and comment about the Institute and the financial services sector.

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Published: 26 Nov 2019
  • Fintech
  • The Review
  • Revolut
  • Monzo
  • digital banks
  • challenger banks
  • technology
  • fintech
  • digitalisation
  • Banking

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