Challenger Banks

There are a dizzying number of “Challenger Banks” emerging to take advantage of the post Credit Crunch shake up in banking regulations, and the impending revolution in banking practices that is forecast to occur with the implementation of PSD2 (Payment Services Directive).

Whilst there appears to be no unanimity about what the opportunities are, the FinTech world is in a frenzy of activity to establish new banking applications, software platforms, “smart” payment cards and new banks – increasingly with banking licences.

Barely a week goes by when there is not another successful round of funding reported by one of these FinTech business, some of which are perceived to be “challengers” to the traditional high street banks in the UK.

A brief review of all this activity and funding raises two questions.

Do all the new banks have a robust business model and can they ALL thrive or indeed survive?

Banking model

The basic model for the new banks appears to be to offer better service and information to clients. Their software is built on new platforms unlike the high street banks who are amending old software and systems, and as result  are able to offer better and faster, often real time, information and analytics to their customers.

They are however very anxious to keep charges to a minimum, whilst having to bear the cost of third party services, such as cash withdrawals from ATMs. One Challenger bank recently closed the accounts of customers who were “over-using”  ATMs. Another bank has publicly revealed that it makes an annual loss of £40 on each customer account.

Currently the “Challenger Banks” main offering and differentiation from traditional banks is helping their customers to plan and budget and understand what they have spent historically. They also are extremely “mobile” friendly and very technologically advanced. Very few offer lending or overdraft facilities.

They will inevitably be in competition with the traditional banks, who will undoubtedly raise their game to maintain market share. So, is there enough room in the market for both the traditional banks and all of the new “Challenger Banks”?

Some Challengers such as Metro are well established. Others such as Tide are niche – they are only active in the Business Banking market, offering a “nimble small business bank account” with no fees, to SMEs. Others are chasing what they see as a gap in the market such as Thinkmoney, who  focus on helping people who struggle to manage their finances. There are also banks for UK military personnel (The Services Family), an Islamic bank (Ummah Finance), a peer to peer lending bank (Zopa) and a bank aimed at ex-pats and immigrants (Monese).  The list goes on!

It is likely that we will see mergers, acquisitions within the Challenger market, and acquisitions of Challengers by the Traditional banks.

The amount of money pouring in to FinTech companies in this new banking sector is a strong indication that financiers think there is a lot of money to be made. But perhaps the financial bubbles we have seen in the past and the flurry of activity in this sector should give cause to think that there may be casualties in this big banking shake up.