The financial crisis was the genesis of a different breed of bank. John Stepek asks why customers would choose one of the digital challengers.
Prior to 2008, the idea of anyone taking on the dominant banks seemed far-fetched. Despite the proliferation of internet access, innovative financial platforms were still in their infancy. Meanwhile, the combination of consumer apathy, regulatory barriers and getting customers to trust an unknown brand seemed insurmountable.
And then the financial crisis came along. Several high-street institutions went to the wall, while the banking sector as a whole needed to be bailed out. Suddenly, the consumer and regulatory backdrop became more welcoming for potential competitors. The fintech sector exploded, and now there are apps for everything from peer-to-peer lending to digital wealth management, and a new breed of digital “challenger” banks.
That term – “challenger” – gets thrown about a lot. When it comes to banks, it really means any bank that is trying to compete with the established names. In the UK, that would mean the “big four” of Barclays, Lloyds, HSBC and RBS, as well as other well-known banks and building societies.
What most challenger banks have in common – with US import Metro being a notable exception – is that they do away with the “legacy” infrastructure (such as branches and often-prehistoric IT systems) that encumbers traditional banks, in favour of online interaction and apps. It’s banking for the smartphone generation.
More recently, “open banking” regulations have forced the biggest bank and building societies to allow third parties to gain access to their data. This means that – as long as the user grants permission – apps can plug into your saving and spending habits, with the promise to help you budget and plan better. In all, it promises a brave new world of better, cheaper services.
Why might I switch?
There are a great many fintech apps, but if we’re focusing on challenger banks then we’re looking for companies that have a full banking licence. That means depositors have protection from the Financial Services Compensation Scheme (which covers you for up to £85,000 if the bank goes bust). Other apps are often included under the challenger bank label but are not banks as such – Revolut, for example, aims to disrupt the foreign exchange industry but it is not a bank and does not have a banking licence.
In general, challenger banks specialise in certain areas rather than offering the range of services a traditional bank will offer. That said, rather than using one provider, you can pick and choose the best products for your needs.
So what’s on offer? For a current account, two of the best-known challengers in the UK are Starling Bank and Monzo. Both are online only, both offer facilities to sweep savings into separate pots, and to monitor your spending habits closely, and both come with contactless Mastercard debit cards.
Starling’s current account pays 0.5 per cent on balances of up to £2,000 and 0.25 per cent up to £85,000, while Monzo’s pays no interest. You’ll find better rates than these on the high street, but one area where Starling and Monzo do offer better value is for frequent travellers. Neither charges any fees on card payments abroad, while Starling also allows unlimited fee-free ATM withdrawals (Monzo charges 3 per cent after £200-worth of withdrawals abroad in a single month). These two are probably your best starting point for day-to-day banking – given the ease of opening an account, you could try out both and see which you prefer.
If you’re looking for a savings account then you could check out the likes of Atom Bank, which regularly features on the best-buy tables for its fixed-term savings bonds. Still, if you’re looking for the very best rates, note that it won’t always be the challenger banks that top the tables – it’s equally likely to be an obscure building society or the local subsidiary of an established overseas bank.
In terms of what most of us care about – interest on savings, and charges on mortgages and loans – challenger banks don’t offer significant benefits over the high street. For now, the best reason for switching to a challenger is to take advantage of the convenience of a “digital-first” provider, particularly if you want to keep track of your spending. That said, given how easy it is to open an account these days, perhaps that’s reason enough to put your apathy aside and give full-blown digital banking a try.
John Stepek is executive editor of Moneyweek magazine
