The rise of the challenger banks | will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by will always be from Be Scamsmart.

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Derin Clark

Derin Clark

Online Reporter
Published: 24/10/2019

This week challenger bank Revolut was revealed to be the fastest-growing bank in Europe, having registered a growth of 3 million users this year compared to 2018.

According to figures released by LernBonds, Revolut has reached 6 million customers in 2019, which is double the number of customers it had last year. In addition to the rapid growth of Revolut, another challenger bank, N26, has increased its customers by 1.5 million users in the past year, while it is estimated that Monzo has expanded by 150%, from 1 million to 2.5 million customers. 

Why are challenger banks growing in popularity?

Challenger banks started entering the UK market after the 2008 credit crash when the restrictions on finance providers entering the market were relaxed to encourage more competition. Over the years, challenger banks have grown in popularity, especially among younger consumers, as many offer a modern digital banking service that appeals to those looking for a quick and convenient banking option.

While ease and convenience have helped challenger banks to grow in popularity, to really make an impact they will also need to offer rates that appeal to consumers. Here we take a look at how challenger bank rates compare to those being offered by traditional high street banks and building societies.

Challenger banks savings rates compared against traditional banks

Taking a snapshot of the savings rates on no notice, one year fixed and five year fixed accounts on the 1 October 2019, challenger banks overall were offering higher average rates compared to well-known high street banks and building societies. At a time when savings rates are falling, the higher rates being offered by challenger banks make these banks highly attractive to savers and could have contributed to the rapid increase in challenger bank customers.

Saying this, savers should not assume that challenger banks will offer the best rates on the market, for example the highest rate currently being offered in the easy access savings chart is from Coventry Building Society paying 1.46% (including a bonus of 0.31%) AER on its Triple Access Saver. The highest rate being offered by a challenger bank in this chart is a monthly rate of 1.45% (including a bonus of 0.10%) AER being offered by Marcus by Goldman Sachs® on its Online Savings Account. When it comes to one year and five year fixed rate accounts, challenger banks dominate the charts offering the top expected profit rate of 2.22% and 2.30% AER in these charts.

No notice accounts

Bank type Number of products available Average AER
Challenger banks 20 1.25%
Building societies 213 0.6%
High street banks 51 0.54%

One year fixed

Bank type Number of products available Average AER
Challenger banks 30 1.68%
Building societies 43 1.21%
High street banks 30 0.91%

Five year fixed

Bank type Number of products available Average AER
Challenger banks 24 2.09%
Building societies 23 1.75%
High street banks 8 1.5%


Challenger banks mortgage rates compared against traditional banks

When it comes to mortgage rates, challenger banks do not offer the same chart-topping competitive rates as they do in the savings charts. In fact, looking at the average rate on two year and five year fixed mortgage deals for home movers, challenger banks offer the least competitive average rates on 60%, 75% and 90% loan-to-value (LTV) tiers when compared to the average rates offered by all providers, and by building societies alone. Traditional banks and building societies currently dominate the mortgage market overall, with Barclays Mortgage offering the lowest two year fixed rate of 1.21% at 60% LTV, NatWest offering 1.25% at 75% LTV and Barclays Mortgage offering 1.77% at 90% LTV. On a five year fixed rate mortgage, Santander is offering the lowest rate of 1.49% at 60% LTV, Santander again offering 1.59% at 75% LTV and Yorkshire Building Society offering 2.21% at 90% LTV. Saying this, when borrowing for a mortgage it is important to look at the entire package on offer, such as the product fee charged, the incentive package and flexible features.

Two year fixed rate (60% LTV)

Bank type Number of products available Average initial Rate
Challenger banks 7 2.76%
Building societies 15 1.82%
All providers 94 1.77%

Two year fixed rate (90% LTV)

Bank type Number of products available Average initial Rate
Challenger banks 17 3.85%
Building societies 60 2.60%
All providers 169 2.74%

Five year fixed rate (60% LTV)

Bank type Number of products available Average initial Rate
Challenger banks 9 3.39%
Building societies 21 2.22%
All providers 109 2.12%

Five year fixed rate (90% LTV)

Bank type Number of products available Average initial Rate
Challenger Banks 17 4.11%
Building Societies 52 2.69%
All Providers 159 3.00%

How safe are challenger banks?

In order to trade in the UK, challenger banks, like any other financial provider, must gain a UK banking licence and are regulated by the Financial Conduct Authority (FCA). While restrictions on financial providers entering the UK market have been relaxed since 2009, getting a UK banking licence is still a long process in which the provider has to prove that it is capable of being able to responsibly hold deposits and lend money to customers. While the 2008 credit crisis showed that even well-known high street banks are not immune to failing, traditional banks and building societies usually have more financial reserves than challenger banks, providing them with more capital on which to fall back on should they run into trouble. This, in part, explains why challenger banks offer highly competitive savings rates as it enables them to build up the deposits they hold, while not having the capital needed to offer highly competitive rates on mortgage deals. Saying this, all cash deposits up to £85,000 are covered under the Financial Services Compensation Scheme should the bank go bust.

Should you consider a challenger bank?

With challenger banks offering highly competitive savings rates, it makes them highly attractive to those looking to deposit their money into a savings account offering a good rate of interest. Those looking for a competitive mortgage deal, however, would likely want to choose a traditional high street bank or building society as they are currently offering far more competitive rates. Consumers should also keep in mind factors other than rates that might impact the type of provider they choose to bank with. For example, those who prefer face-to-face banking would probably be happier to forego the high rates being offered by challenger banks in return for a lower rate but the ability to bank in a local branch. While those looking for a mortgage should consider the whole package on offer, including factors such as product fees, incentives and flexible features, when choosing the right deal for their personal needs. 


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