A challenger bank is a new retail bank that directly competes with well-established traditional banks. The term is more widely used in the U.K., where challenger banks aim to serve the population that the “Big Four” (Barclays, HSBC, Lloyds Banking Group, and NatWest Group) typically fail to. Over time, though, the term has been recognized globally.

In some cases, challenger banks are created by traditional banks to cater to customers that they can’t serve. In others, conventional banks that “fail” transition into challenger banks.

Other interesting terms…

Read More about a “Challenger Bank”

Is a Challenger Bank the Same as a Neobank?

While all challenger banks are considered neobanks, not all neobanks can be classified as challenger banks. Their main difference? Not all neobanks have a banking license, while all challenger banks do. Both, though, only operate online and don’t have physical establishments.

Why Are Challenger Banks Seemingly Giving Traditional Banks a Run for Their Money?

Given that challenger banks are licensed to operate and provide the same services as their brick-and-mortar counterparts while saving on operational costs, they offer better interest rates to customers. They don’t need to pay for property rents or leases and taxes nor as many employees as a traditional bank would. That and other savings allow them to offer clients higher interest rates on savings and lower loan payments.

Challenger banks’ value proposition has led to the neo- and challenger banking industry, pushing experts to forecast a market value of US$356 million by 2025. This prediction has led traditional banks to create challenger banks. The Lloyds Banking Group, for instance, established TSB Bank. Other traditional banks, meanwhile, are endeavoring to partner with well-established challenger banks. Several banks across Europe, for example, have partnered with Revolut.

What Services Do Traditional Banks Offer with Challenger Banks’ Help?

To tap the growing challenger bank market, traditional banks can partner with them in various ways to offer services like:

  • Better online banking: Admittedly, traditional banking apps lack many features that those of challenger banks offer. Challenger banking apps can round up transactions faster, allowing customers to keep track of their budgets in real-time.
  • Small business loans: While traditional banks still have more money than challenger banks, they often can’t cater to smaller businesses that may not pass the criteria required to obtain loans. In such cases, traditional banks can provide the money while challenger banks take care of the nitty-gritty.
  • Personal or consumer loans: Let’s face it, most consumers can’t pass the criteria to get credit cards or personal loans. People who only need to borrow small amounts can go to challenger banks instead of their traditional counterparts.
  • Debit cards: Many consumers still consider banks fearsome institutions. They remain wary of opening accounts no matter how much assurance traditional banks give. Challenger banks’ more personalized approach can address this gap, making traditional-challenger bank partnership a win-win.

Is Challenger Banking Safe?

Since challenger banks have their own banking license, they can be considered safe. But to better assuage user fears, they often partner with traditional banks to provide better financial protection. They do so through banking-as-a-service (BaaS) infrastructure. In this business model, challenger banks rent a banking license and security features from an established bank, which gives their customers deposit insurance protection.

On the cybersecurity side of things, challenger banking apps have built-in features to keep client information private. Some use fingerprint scanning instead of passwords or require two-factor authentication (2FA). Others issue real-time alerts every time someone accesses a customer’s account, give the option to lock or freeze a lost or stolen debit card, or provide zero liability for unauthorized debit card use.

Given the rapid pace of the neo- and challenger banking industry growth, it looks like challenger banks are the way forward. To stay ahead of the game, traditional banks can expand their portfolios by partnering with challenger banks to bridge the customer gap.