Challenger Banks: a flash in the pan or a pivotal development in UK banking?
Monday 9th December 2019
The rise of new entrants to the retail banking sector – so-called ‘challenger banks’ – has been one of the greatest changes to the UK consumer financial services market in recent years.
UK retail banking has traditionally been dominated by the ‘Big Four’ clearing banks, namely (in their current forms) Barclays Bank, HSBC, Lloyds Bank and The Royal Bank of Scotland (RBS) – alongside their respective subsidiary brands.
Look to 2019, however, and the sector has been significantly disrupted by the challenger banks. Names such as Monzo, Starling Bank and Revolut are now well-known providers of UK current accounts.
Indeed, their growth in recent times has been impressive. Andrew Hagger of MoneyComms notes that, in the first six months of 2019, current account switching figures show Monzo gained a net 20,745 new accounts from its rivals. In that period, Starling Bank gained 11,919 new switched customers.
These challenger banks have also secured significant backing in recent funding rounds. KPMG notes that, in November 2017, Monzo secured $93 million – this in addition to $27.5 million raised earlier that year. Also in 2017, challenger Atom Bank raised $140 million. KPMG also highlighted Starling Bank’s September 2017 announcement that it was raising $54 million in new financing as a further sign of the new entrants’ potential for further growth.
Furthermore, just this year, Monzo raised £113 million from investors – in a move which increased the business’ valuation to £2 billion.
The challengers’ exponential rise, however, is far from guaranteed over time. Though popular with millennials for their focus on technology-driven solutions to key retail banking problems, many new entrants to the sector have struggled to overcome strong consumer brand loyalties to the established banks.
Examining figures from the Financial Conduct Authority, the top six banks in the UK accounted for 87% of personal current accounts in 2017 – representing a notable increase on the figure of 80% in 2000.
Nevertheless, that is not to suggest that the traditional incumbent banks are safe from losing market share to the new entrants. In a 2019 customer satisfaction survey by consumer group ‘Which?’, Starling Bank and Monzo placed second and third respectively. First place went to First Direct – arguably one of the UK’s ‘original’ challenger banks with its pioneering use of telephone banking in the 1980s, following its establishment as a subsidiary of Midland Bank (now HSBC UK).
Additionally, just last month, RBS launched its new digital retail banking product under the name ‘Bó’. Bó is marketed as a current account product, though it does not presently offer interest payments, or participation in the Bacs payment clearing system – meaning that users cannot make direct debit instructions or have a salary paid directly into the account.
Interestingly, The Guardian notes that – in its current form – Bó is much more akin to a pre-paid card product than a traditional current account, much like the initial product offered by Monzo before that provider received its UK banking licence in 2017.
It seems clear that the traditional UK banks are feeling a substantial degree of pressure from their new challenger rivals. It will certainly be interesting to see the development of the UK retail banking market, in light of this, in the years ahead.
