Over the last few years, the financial industry has been taken aback by the success of so-called ‘challenger banks’. Several new start-ups have set about revolutionising the banking industry, using the negative sentiment in the wake of the financial crisis to providing consumers with quicker, easier and more trustworthy options for their savings.
This week one such bank, Monzo, beat its crowdfunding target in just four hours, after launching pre-registration for a campaign on Crowdcube. This achievement came just weeks after the bank attracted £19.5 million worth of seed investment from Thrive Capital, Passion Capital and Orange Digital Ventures – clearly, investors see potential in the future of these banks.
In the wake of the financial crisis, savers confidence in the UK banking system hit rock bottom. A YouGov survey from 2013 shows just how far the public’s trust in the banking industry had eroded; 84 percent of respondents agreed with the statement “bankers are greedy and get paid too much”.
To shrewd entrepreneurs, it became obvious this left a huge gap in the market for banks that savers could trust. The Bank of England made the sector easier to enter for incumbents by simplifying the process needed to set up a new bank, lowering the capital requirements in 2013.
Against all odds, several banks have taken advantage of the climate and succeeded in creating a trustworthy and efficient alternative to the traditional high-street banks – often by utilising technology and basing themselves entirely online.
Mobile-only bank Monzo, which changed its name from Mondo late last year after a legal challenge, is based on the principle to the technology and a user-friendly, data driven approach to personal finance. The process of getting a banking license can be difficult, however, and Monzo was only granted restricted banking licence by UK regulators in August 2016. Whilst this means Monzo is now able to hold customer money and start to test out products like current accounts, it still has some regulations on what products it can offer.
The bank’s founder, Tom Blomfield, is confident that challenger banks are the way forward. “There will be bank started this decade that will be the size of Google or Facebook,” he added.
Atom Bank is a similar offering, and one of the only challenger banks started outside the safety of London. Based in Durham, Atom was one of the earliest banks to be given a license. It has been authorised to take customer deposits since November 2015 and was launched in full after its regulatory authorisation restrictions were lifted in April 2016.
Since then, Atom has seen impressive growth; in December of 2016 it announced partnerships with several advisers across the country to allow the bank to offer mortgages. This puts Atom miles ahead of many competitors, including Monzo as well as Tandem and Starling, who are still preparing to launch after gaining a licence from the financial regulators over the past year.
A different style of challenger bank is Metro, who have opted to maintain a high street presence rather than be digital only. The US-born Metro hit the streets of London for the first time in 2010, becoming the first new bank in the UK in 150 years. In March 2010 the bank floated on the London Stock Exchange, raising £1.1 billion in private capital.
Rather than being mobile-only, Metro Bank’s USP is customer service. Dog treats are offered in all stores to ensure that all customers – big or small – feel at home, and a bank account can be opened with no proof of address, just a passport. The card is then issued on the spot – no waiting around for envelopes and PIN codes in the post – and as standard, current accounts have no transaction fees in Europe.
Now that everything is done online at the touch of a button, the complex security systems of traditional banks online offerings are way behind the curve. The potential for these ‘challenger banks’ so succeed is clear; but only time will tell whether they have what it takes to steal a real slice of the market from the British banking giants.