Challenger banks are exactly that: smaller banks set up with the intention of challenging the ‘Big Five’ traditional banks that, until the financial crisis of 2008, dominated the UK market.


Historically, the UK banking sector has been more or less controlled by Barclays, Lloyds, HSBC, Santander and the Royal Bank of Scotland who, according to a report from the Centre for Economics and Business Research, hold a combined £827 billion of the UK’s household deposits, which still equates to a very healthy market share of 63 per cent. Prior to the 2008 crisis, however, setting up a bank in the UK was both extremely expensive and extremely time-consuming; so difficult in fact that when Metro Bank was issued a license in 2010, it was the first to do so in a hundred years. 


What the financial crisis did point out glaringly though is that somewhere amongst the outdated workings of our stuffy old system there was room for improvement, and that in order to offer customers more diversity where monetary financial credit institutions are concerned (as well as create a much more resilient market), the UK’s banking sector had only one choice: to open up and get more savvy, especially where tech is concerned. 


To be fair, banking has always flown a flag for technology-driven change. From rolling out ATMs in the 1970s to the introduction of contactless payment in September 2017, the data- and transaction-driven world of finance has lent itself readily to digital change and challenger banks are smaller banks that offer services via an app or through their websites, allowing you to do just that: bank digitally.


These new kids on the banking block – often referred to as FinTech (Financial Technology) companies – usually can’t be found on the high-street, instead they’re in your pocket. Supported by relaxed regulation (more on this later) and the fact that people now use their phones to do, well, everything, branchless, mobile-only banks are fighting hard to win customers from their more established rivals.


In the last five years alone, more than 3,000 bank branches have closed their doors across the UK, and of those that remain, many now operate reduced opening hours (probably only to avoid upsetting the technophobes on their books), which has given challenger banks the chance to overtake by way of services that high street banks don’t offer or are still developing, such as instant notifications on spending and free budgeting tools.


If you need to do something that you’d normally visit a bank branch for, like depositing a cheque (millennials don’t even check their bank accounts let alone know what the point of a cheque is, surely?), challenger banks give you the green light to use the Post Office, as well as doing away with fees like charges on overseas spending. 


As with everything these days (bloody hell, using phrases like that maybe I’m one of the old biddies insisting that banks have branches), the world of challenger banks involves categories, sub-categories and probably sub-sub-categories galore, especially if you’re talking to a FinTech expert which, *spoiler alert*, I am not one of. There are multiple challenger banks in existence, some of whom have been around for a while and others that are relatively fresh onto the market such as Sharia banks that operate on Islamic finance principles.


Likewise, some accounts are aimed at people with standard banking requirements, but a lot of banks have designed products and accounts specifically for sole traders and small businesses, so it’s going to be helpful if we have a look at, broadly speaking, the main different types of challenger bank out there. 


Mature Challenger Banks


Most of us presume all challenger banks are providers that are pretty new to the market, but there are a few that have been established for quite a few years… TSB and First Direct ring any bells? Yep, these are both considered mature challenger banks. First Direct, which was launched way back in 1989 and was the first bank to operate in the UK with no physical branches, is considered as mainstream as many of the larger banking institutions and has a successful standing in the market undoubtedly paving the way for many of the later challenger banks starting up.


New Challenger Banks


In the world of challenger banks, if you’ve been operating for three years or less you’re considered new; what comes with this youth is an innovative, finger-on-the-pulse approach to providing banking services, but this enthusiasm doesn’t automatically establish you as a force to be reckoned with in the market at large. As is often the case with challenger banks generally, the newest kids on the block will often get customers’ attention with the best deals and most attractive interest rates.


High Street Challenger Banks


Bucking the trend of branch-less banking and therefore competing with high street banks on their own terms, some high street challenger banks like Metro Bank (MTRO), are new to the UK market while relative old-timers like Virgin Money and TSB are offshoots of larger banks and have been around for yonks. Virgin Money (founded in 1995) emerged from the old Norwich Union Insurance group and expanded by acquiring Northern Rock building society’s mortgage book, while TSB was revived by the Lloyds Banking Group decades after the name disappeared in 1996.


Sharia Challenger Banks

Likely the least familiar with consumers outside of the Islamic tradition in general sit Sharia challenger banks (such as Niyah, which launched in the UK in early 2020). In very basic terms, Sharia challenger banks are run in accordance with the principles of Islamic finance and cover two fundamentals: ethical banking and the charging of interest.





Making the leap from traditional high street bank to possibly branch-less challenger bank is likely a daunting thought; not many of us thrive on change, particularly where money is concerned, and some of us simply can’t be bothered to rock the boat. The winning hand of any challenger bank however is an excellent response to customer needs (actual, real-life ones, not outdated ones dreamt up in a boardroom 70 years ago) combined with a genuine enthusiasm to solve problems — motivate yourself to find out exactly what they can do for you and your business and you may find they’re a breath of very fresh air.




They already do everything banks do, and usually more

They might seem mysterious because of their very limited or non-existent physical presence, but challenger banks are banks: you can deposit physical cash, check your (instant) balance whenever you like, make online payments, and, a big bonus for small businesses, this all links up with your accounting software. Going above and beyond most high-street banks, extras include minimal (or no!) monthly fees, helpful notifications and excellent exchange rates.


Tech is your best friend

Of course the Big Five are hot on the heels of all of the fantastic tech that’s powering the challenger banks’ charge for a slice of the market, and they’re developing as quickly as they can, but that will never be as quickly as the FinTech challenger banks are developing the high-tech features that define them. Sticking with the banks you’ve used for decades might feel stable, but it could also feel a little bit samey — as challenger banks grow alongside tech’s heady advances, you’ll be at the front of the queue for of all this FinTech development.


You can manage your money and more on your phone 

Challenger banks are predominantly online, so you manage your finances remotely. Not only will you never have to go into a physical bank again, you probably won’t even need to go near your laptop to make payments or check your balance because you can do it all from your smartphone.


They’re super speedy

Thankfully, the days of waiting a week for a replacement debit card are long gone and high-street banks have gained some speed with their basics, but challenger banks are as quick as a whippet; with some you can set up an account in around 10 minutes. 




No face-to-face interaction

Very few challenger banks have physical branches, which may present a problem for those who still prefer dealing with their bank face-to-face.


Absolute protection isn’t guaranteed

Challenger banks have to abide by the same rules and regulations as other banks and most, but not all, are protected by the Financial Services Compensation Scheme (FSCS). That means if they go bust, you are covered up to £85,000 if you have FSCS protection. For larger businesses, that level of insurance won’t cut the mustard, so a bigger bank is — for now anyway — the best option to protect bigger bucks. 


Better the devil you know?

Some small business owners prefer to stay in the ‘tried and tested’ lane, which makes sense — if your bank gives you great interest rates, you have a trusted and close relationship with them, and they’re prepared to throw in some extras in you just can’t turn down, there’s little reason you’d not want to stay loyal to them. 

There are lots of challenger banks out there (11 main ones according to this interesting piece of research) and online you’ll find pros and cons for all of them, and a wealth of additional research as to whether their model is sustainable and what types of individuals and businesses they are suited to. Which? have an excellent list of impartial reviews that are great food for thought too.


Our advice? Research. Then research again. But don’t be scared of this innovative challenge to the more traditional aspects of our somewhat outdated banking system — the future is tech, so it makes sense that our money would be better placed in our own pockets then behind a desk.

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