What is a challenger bank and why are they different?

Challenger banks have emerged online, what are challenger banks and why are they different?


Technology is a key factor in disrupting markets and digital disruption is impacting all sectors of business. As an example, in 2018, we are often bombarded with the term ‘challenger bank’, but what does it mean and why are they different? In the most generalised sense, they are banks that are set up to challenge the big players, such as Barclay’s, Lloyd’s and HSBC, by using new technology and techniques to make their banking easier, more accessible for all and more secure.

Challengers tend to adopt different marketing strategies. They are often more agile – fewer legacy systems, they have analysed what works and what doesn’t from existing competitors and they often focus on a nice market to offer specific offers.

This post looks at Starling bank, Monzo bank and TransferWise. As challengers they have a clear market focus and have adopted niche marketing strategies, such as saving within your current account or sending money to family abroad without the need for using services like Western Union or MoneyGram. These banks are well-suited for students and people with relatives overseas.


Challenger banks tend to share common characteristics including

  • app-based interactions
  • no website online banking
  • no call centres
  • no high street branches

Plus, they all seem to share the gimmick of an extremely bright card, these can be green, bright pink or fluorescent yellow – clearly aimed at a younger audience.


Challenger bank – Starling Bank

Starling Bank are ideal for students and those seeking to better manage their finances as their app is built for savings.  The app enables customers to keep track of where spending takes place and facilitates ways to prevent m overspending and to save money in designated places.

Firstly, you can ringfence funds within the app. You can create up to 20 different ‘spaces’ which act, to all intents and purposes, as separate bank accounts or savings pots – the original piggy bank. For example, you could make one for ‘Christmas Presents’, one for ‘Holiday’ and another for rent. Any money that you place into these spaces will not appear in the account’s main balance. Therefore, you won’t spend money that you really need and put can save for a rainy day without having to worry about withdrawal limits, or moving it between different bank accounts.


Challenger bank – Monzo

Have you ever forgotten to cancel a membership after a free trial? Monzo Bank allows you to keep track of all the direct debits, recurring payments and subscriptions linked to that account, and even lets you cancel them from the bank application. It also provides a simple, easy to use application, like Starling’s and allows you to ringfence funds and keep track of your spending.

Similar to Starling, Monzo enables spending budgets to be set-up, in specific areas. The app recognises certain retailers and what they sell, so you could limit how much you spend on groceries, nights out and other categories in order to control how much you spend on certain things.


Challenger bank – TransferWise

If you work in the UK and have family in other countries, there are three main options for sending money abroad. These are money transfer services, like Western Union, who take a percentage and have less attractive currency exchange or fee rates. Another option is sending it via your bank, who use SWIFT services and charge a fee of £25 to £50 and also set the exchange rate. Another alternative, which is not recommended, would be exchanging money at a bureau de change and physically take notes with you on your next visit. Of the three, specialist remittance companies like Western Union are the most price effective option, but all of these options result in huge chunks being taken from both senders and receivers. To address this, new options have emerged, such as TransferWise who have made it simpler to send money to friends and relatives overseas.

As an example, a quick comparison shows that TransferWise is cheaper than Western Union when sending money to another country.

TransferWise money transfer

Western Union money transfer

That’s a difference of ₱1000 pesos when sending £1000. In local currency terms, that is enough to buy up to 1000kg of rice at a local market!

And, TransferWise can still be a normal bank account, which you can use for everyday purchases in the UK, with an easy to use app.


Challenger banks provide another alternative to the typical high street banks, but there are downsides

  • These are established for individuals, some business accounts have been established but are not yet widely used
  • Their track records have not yet been established – Monzo is crowdfunding – does this mean they are not financially secure?

Whilst the functionality is often about saving, there are fewer other benefits that may be offered by longer more established banks. Whether or not challenger banks are the future of banking is another, but as many banks are starting to replicate the features of these challengers, their impact on the marketplace is having an impact.