Back to Zopa Blog

What you need to know about challenger banks

A new wave of high-tech challenger banks is set to shake up the UK’s finance industry. The likes of Atom, Tandem and Starling hope to become household names to rival Barclays, HSBC and Lloyds over the next few years.

These new firms are pinning their hopes for success on innovative use of new technology, and on the fact that, increasingly, people are happy to manage their savings, mortgages and current accounts, as well as many other aspects of their finances, exclusively online.

Why did challenger banks develop?

In the wake of last decade’s financial crisis, it was hoped that a new wave of entrants to Britain’s banking sector would help to shake up the sector and end our reliance on a handful of too-big-to-fail institutions. In the years following the crash of 2008, a number of new firms did emerge: they included Metro Bank, which Zopa partnered with in May last year and in 2010 received the first new high-street banking licence in more than a century, as well as competitors such as Virgin Money and Aldermore.

But these businesses have largely been attempting to take on the big banks at their own game, by setting up national branch networks and otherwise behaving in a traditional manner (albeit with a refreshing focus on customer service).

A new breed of digital challenger

This year’s upstarts are different, though. Atom Bank, which is backed by Metro founder Anthony Thompson among numerous notable investors, has just launched and, for now, customers can only deal with it via an iPhone or iPad app. To date, Atom is only providing savings accounts (offering relatively generous rates by current high-street standards), but the company’s USP is that it will in time offer an entire banking experience via mobile.

What can the challenger banks offer?

A similar approach will be taken by Tandem, Mondo and Starling when they join the fray over the next few months. But what do these digital challengers have to offer?

One of the key areas of competitiveness is likely to be the financial incentives they can provide to customers: without the overheads of a branch network, these companies should be able to afford to offer higher savings rates and greater transparency.

App-based banking

Additionally, the time is probably right for the introduction of app-based banking, given the ubiquity of smartphones these days and the fact that more and more people are happy to rely on their smart phones for everything from shopping to booking holidays.

Another plus point is that none of these new entrants were around during the financial crisis and so will be able to launch with a clean slate and build trust with consumers through their mobile experience. You can read more about the advantages of fintech firms in the Telegraph.

The current account challenge

But one big question is whether the challengers will be willing or able to offer decent current accounts. These products tend not to generate huge returns for banks and can be expensive to run. What’s more, the arguable failure of recent government-backed switching initiatives shows that people are not particularly keen to change account providers.

Nevertheless, if Atom and its rivals can make an impact with their initial banking activities, we should hope they can manage to bring much-needed disruption to the current-account market as well.