Challenger banks, or digital banks, have disrupted the traditional banking industry since they first emerged about a decade ago. These banks are beating their long-established rivals in the popularity stakes, thanks to their latest technology, lack of legacy IT systems, mobile services, and being structurally and operationally more efficient. While the trend has been particularly strong in the UK, it’s also happening in Europe, North America, and other regions.
Despite their success, it has been far from easy for the new kids on the block. The largest banks still control a vast share of the market, and customer inertia has hindered the challenger banks’ growth. However, the future looks promising for them if they stick to their guns.
Scale and mid-tier challengers have provided additional choice and value for consumers. Still, it’s digital challengers that have rapidly gained share in the UK’s personal current account (PCA) and small business current account markets, with around 8% market share for PCAs. On the downside, the PCAs held with digital challengers tend to have lower balances, transaction volumes, and overdraft usage.
The UK is by far the biggest market, with 39 challenger banks and a combined funding of $7.9bn. Germany is second, with ten banks and a combined funding of $1.9bn, and the Nordics region is third with six banks and a combined funding of $545m.
Attractions of Digital Challenger Banks
Digital challenger banks are appealing for their modern design, personalization, low fees, and snappy customer service. In the UK, Which?, the consumer association, named Starling and Zopa as the top digital banks for current accounts and savings, respectively. These two banks earned five stars for every aspect of their services and were named “Which? Recommended Providers.”
On the other hand, high street banks continue to underwhelm, with TSB coming near the bottom of the table for current accounts and savings. HSBC and Royal Bank of Scotland also failed to impress in many areas, though both scored decently for their mobile apps.
The Competition and Markets Authority (CMA) conducts a bi-annual survey ranking the service quality of personal and business account providers in Great Britain and Northern Ireland. In the most recent survey, Starling Bank and Monzo, both digital banks, came joint first, followed by First Direct, a telephone and internet banking subsidiary of HSBC, which came third.
Despite the challenges, digital banks have proven to be a serious threat to traditional banks. While traditional banks still have the majority of the market share, digital banks are rapidly gaining market share by offering innovative mobile apps and easier banking experiences. The competition and innovation from digital banks have forced traditional banks to improve their service quality, ultimately benefiting customers.
As we move further into the digital age, we can expect more digital banks to emerge and transform the banking industry. The future of banking is undoubtedly digital, and traditional banks will need to adapt if they want to remain relevant in this rapidly changing landscape.