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What is a challenger bank?

From food delivery to streaming, disruption has affected virtually all areas of modern life, so it’s no surprise that it’s finally reached the financial services sector. How so? Challenger banks. Aiming to compete with the established firms and provide consumers with greater choice, challenger business banks are attracting an increasing level of attention. Find out everything you need to know about the rise of challenger banks in the UK, right here.

Understanding challenger banks

Challenger banks are start-up banks. They’re referred to as “challengers” because they’re looking to compete with established banking options. In the UK, this means that they’re challenging the big four: Barclays, Lloyds Banking Group (Bank of Scotland, Halifax, Lloyds Bank), HSBC, and RBS (NatWest, Ulster Bank). There are many different types of challenger business banks, including banks with a high street presence, digital challenger banks, Sharia banks, and banks that are focused on commercial lending.

So, what are the characteristics of these types of banks? Essentially, challenger banks tend to focus on digital technology and online customer experience. They offer a more diverse range of services and will often provide better interest rates than the comparable options from traditional banks. However, it’s also worth noting that SME challenger banks are much more prone to failure – as in the case of Loot, a digital current account for students – than the incumbent banking options in the UK.

What’s behind the rise of challenger business banks?

Although there are challenger banks throughout the world, they are particularly prominent in the UK. This is due to a couple of different factors. After the financial crisis of 2008, the UK government opened up the market to new banks, paving the way for challenger banks to emerge on the scene.

Previously, the process of obtaining a banking license was too time-consuming and expensive, which meant that for over a century, the big four banks had virtually no competition.

This flexible regulatory framework, combined with the growing consumer demand for freedom of choices in all areas of life – including banking – has contributed to the rise of challenger banks in the UK. It’s also important to note that widespread technological innovations have made it much easier for new banks to get started, while European regulatory changes like PSD2 and open banking have created an environment where fintech-driven start-up banks can thrive.

Who are the challenger banks in the UK?

For those who are interested in banking with a challenger bank, the UK has a wide range of options. Some of the most popular include Monzo, Starling, Metro Bank, Revolut, and Atom Bank.

Ultimately, the best challenger bank for you depends on the specific needs of your business. We would advise aligning your needs to the solutions that each of the banks offer. Get in touch with the challenger banks, read their terms and conditions and talk to their current customers to understand their core qualities & features. As challenger business banks may be more prone to going bust than incumbent banks, you should check what protections are in place for your money before you open an account.

The future of SME challenger banks

Challenger banks are growing aggressively, and while there are always teething problems for disruptive businesses on this scale, increasing numbers of customers are choosing to take their banking into the digital world. So, what does the future look like for challenger business banks?

Well, with competition in the sector now a chief priority for regulators, we can expect to see challenger banks continue to grow. Some of the more innovative traditional banks are even backing these new banks in the hope of making a profit. In any case, it’s clear that the days of unopposed dominance enjoyed by the big four are well and truly over.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.