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Published 28 May 2021
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What are challenger banks?

Challenger banks like Monzo and Starling are small, newer banks competing with bigger traditional banks. Learn more about the competitors, how they’re changing the UK banking industry and if your money is safe with a challenger bank.

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Challenger banks are newer banks armed with the latest technology and on a mission to attract customers away from the UK’s biggest traditional banks: Barclays, HSBC, Lloyds, NatWest and Santander.

You might also see challenger banks called neo-banks, digital banks or fintechs (financial technology companies).

Challenger banks create healthy competition in banking and this is encouraged by the government. After the financial crisis of 2008, the government investigated the banking industry and in 2012 made recommendations to improve and secure banking for the future. The plans included opening up regulation to allow new companies to enter the industry. These changes, along with grants for innovation, growth and incentivised switching, allowed British challenger banks to flourish.

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How are challenger banks different from high street banks?

Most challenger banks were established within the last ten years and they’re smaller than the high street banks. For example: Monzo was founded in 2015 and has a team of less than 2,000 (at the time of writing). In contrast, Barclays was founded in 1690 and employs over 83,000 people.

Some challenger banks offer the same services as traditional banks while others are digital-only companies specialising in only one service such as mortgages, loans or business banking. Many but not all challenger banks are online-only.

What are some examples of challenger banks?

UK-based challenger banks such as Monzo and Starling are rapidly becoming household names. All three started out doing personal accounts only, and now they also offer accounts for small businesses.

Some challenger banks offer specific services, such as Tide, Coconut and Anna which specialise in business current accounts and finance admin tools.

And some banks which have been around for longer such as Virgin Money and Metro Bank are also considered to be challenger banks.

What is an online-only account?

With an online-only bank account, you’ll apply for and manage the account entirely online via your website login or the bank’s app.

Online-only providers offer similar services to high street banks with one big difference: online-only banks don’t have branches. You’ll typically communicate with customer services by live web chat, text message, email and/or telephone.

How are challenger banks changing the banking industry?

The healthy competition driven by challenger banks is improving the whole UK banking industry. As challenger banks offer better deals and develop innovative services, traditional banks retaliate by improving their prices and services to match.

Before 2012, we had limited options for our personal and business banking. Nowadays there’s an array of services on offer to suit how you want to do your banking, plus handy features like app notifications and spending categorisation that didn’t exist until recently. And if you’re not happy with the bank you choose, it’s easier than ever to switch to another provider with the Current Account Switch Service.

If there’s a downside to having more companies competing for our custom, it’s that choosing an account might take longer. But it’s worth taking the time to review what you need and what’s available to find an account that’s the perfect fit for you or your business.

» MORE: Pros and cons of online business bank accounts

Are online-only banks cheaper?

You might think that online-only providers would be cheaper because they don’t have branches and big call centres to maintain. But online-only providers don’t usually have the extra revenue high street banks earn from customers paying interest on loans and mortgages. All businesses have to balance their books so you’ll find that fees vary depending on the provider and what services you need for your account.

Is my money safe with a challenger bank?

Before opening an account with any provider, it’s sensible to check whether the account is a ‘bank account’ or an ‘e-money account’ because this affects how your cash is protected:

  • Bank account: Your money is protected by the Financial Services Compensation Scheme (FSCS)If the bank is authorised by the Prudential Regulation Authority, then it’s covered by the FSCS. If your bank fails, the FSCS will return your money – the scheme covers up to £85,000 in ‘eligible deposits’ per person.
  • E-money account: Your money is safeguardedIf your provider isn’t a bank but instead has an e-money licence, they are regulated by the Financial Conduct Authority and they have to safeguard your money. FCA safeguarding rules mean that money in e-money accounts can’t be loaned out. This is different from money held in bank accounts because banks lend money as loans and mortgages.

A provider’s website should make it clear whether their accounts are bank accounts or e-money accounts. If you’re not sure, you can check the provider’s entry in the FCA’s Financial Services register.

Because you’ll be accessing your account online, you’ll need to take all the usual precautions for online safety. For example, restricting who can use your mobile phone and other devices, using a strong password and not logging in on a shared computer.

How long does it take to open an account with a challenger bank?

Your new account with a challenger bank could be open within minutes. How can digital banks open an account so quickly? Because the technology is now lightning-fast.

Banks used to have to check your photo ID in person at a branch, but banks can now match a selfie or video with your photo ID – usually a passport or driving licence – in seconds, and verify you electronically by checking your details against national databases. To verify your address, you used to have to show a utilities or tax bill but banks can now check your address on the electoral roll. So if you’re easy to locate on the national databases, then you’ll have your account number and sort code in minutes.

If you apply online and the account isn’t opened straight away, you can expect a message or phone call from the bank asking to check a few facts.

How can I compare accounts with challenger banks?

When you’ve decided what features and services you need from an account – and what you can live without – then you’re ready to compare what’s available.

Our personal account comparison service includes offers from UK challengers, online-only and app-based banks, alongside accounts from high street banks:

And if you’re looking for a business account, we’ve compared accounts for brand-new businesses and existing businesses thinking about switching:

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