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UK Challenger Banks: Digital start-ups seek to rival established players

Challenger banks in the United Kingdom are defined as any bank outside the major firms of Barclays, Lloyds Banking Group, HSBC, the NatWest Group and Santander. There are established challengers such as TSB, MetroBank and Virgin Money which have branches across the country. However, in recent years there has been a swathe of new entrants which are digitally based predominantly through smartphone apps. Starling, Monzo, Revolut and Atom are some of the firms having a major impact on the sector but there are numerous different offerings from a growing number of firms.

Monzo and Starling have seen the greatest growth amongst the fintech start-ups in the past couple of years. Monzo currently has almost five million customers which is up from 3.9 million in February 2020 and 1.6 million in February 2019, as reported in the firm’s annual reports. Starling has also seen growth in customers with over 1.5 million in total in October 2020, of which there were 1.42 million retail accounts, up from 827,0000 in October 2019, and 256,000 business accounts which doubled over the same period. This pales in comparison to the numbers high street banks have with Lloyds Banking Group and Barclays serving 26 million and 24 million respectively. Starling is set to be the first retail challenger in Europe to make a profit after breaking even in October, which bodes well for the sector. OakNorth, another challenger bank targeted at businesses, did make a profit of GBP66m ($84.2m) in 2019 but Starling will be the first bank aimed at the general public to reach this milestone.

Firms offer premium services with added perks for customers who are willing to pay a small monthly fee. Monzo Plus was initially launched in 2019 but discontinued after five months. A new product was developed but was focused on travel benefits so when the pandemic hit the firm needed to rethink again. Monzo Plus was eventually relaunched for GBP5 ($6.40) a month including travel insurance, gadget insurance, third-party bank account aggregation, virtual debit cards, custom transaction categories, credit score updates and interest on savings up to GBP2,000 ($2,551).  Revolut also offers a variety of paid services with Revolut Premium and Revolut Metal costing GBP6.99 ($8.92) and GBP12.99 ($16.57) a month respectively. The firm recently introduced a cheaper alternative Revolut Plus for GBP2.99 ($3.81) a month with benefits predominantly for those using the card in their home country which may be attractive during time affected by the pandemic. The premium services allow access to Revolut Junior which allows a child to have their own contactless payment cad attached controlled by their parents through their Revolut account.

Although the rise of digital challenger banks has been well documented there are still questions over whether they provide a serious threat to leading banks. Most users tend to have a traditional account with a leading bank in addition to an account with a challenger which may be used for weekly or monthly budgeting. In order to win over a customer’s full finances, these firms will need to demonstrate that they can provide long term financial security. This is difficult when the firm is making a loss or only minor profits.