Derin Clark

Derin Clark

Online Reporter
Published: 14/05/2020

With savings rates falling, consumers looking to earn the best interest rates possible are often having to turn to less well-known challenger banks. Understandably, many savers are cautious about depositing their money into banks that they are not familiar with, but with challenger banks offering attractive rates, savers could find they are missing out by being too cautious.

To help savers decide whether or not to bank with a challenger we’ve looked at how safe they are for consumers.

What is a challenger bank?

A challenger bank is a term used to describe a new bank that challenges the dominance of traditional high street banks. Not all challenger banks are from unfamiliar brands, for example Marcus by Goldman Sachs® and Ford Money are both considered challenger banks despite being part well-established brands.

Challenger banks started appearing over a decade ago in the wake of the 2008/09 financial crisis when consumer confidence in traditional banks was severely dented. Over the last decade many challenger banks have flourished and, particularly in recent years, they have become highly popular with younger banking customers. For example, last year we reported that the challenger bank Revolut was the fastest-growing bank in Europe, which registered a growth of 3 million users in 2019 compared to 2018. Meanwhile N26, another challenger bank popular with younger consumers, had increased its customers by 1.5 million users in 2019.

Is your money safe in a challenger bank?

All the savings accounts that are listed on this website are covered by the Financial Services Compensation Scheme (FSCS) or a similar protection scheme. This means that up to £85,000 of your money in a savings account is protected by the scheme, no matter if it is deposited in a traditional bank or a challenger bank. To find out more about this scheme, visit our depositor protection schemes guide.

How do challenger bank rates compare to high street banks?

One reason why challenger banks have become popular over the last decade is that they often offer higher savings rates than traditional high street banks and building societies. For example, today the top rate being offered in the easy access, as well as the one, two and five year fixed rate bond charts, are all being offered by challenger banks.

RCI Bank UK has the best paying easy access account with its Freedom Savings Account paying 1.20% AER. Meanwhile, Bank of London and the Middle East (BLME) pays the top one and two year fixed bond rate, with the one year version of its Premier Deposit Account paying an expected profit rate of 1.55% AER, and the two year option paying an expected profit rate of 1.70% AER. Two challenger banks pay the top rate of 1.85% AER in the five year fixed rate bond chart, with BLME paying an expected profit rate of 1.85% AER on its Premier Deposit Account and Gatehouse Bank paying an expected profit rate of 1.85% AER on its Fixed Term Deposit.

Are challenger banks secure from fraud?

For many savers ensuring their hard-earned savings are protected from online theft and fraud is a major priority. While no bank is completely secure from criminals, challenger banks are normally as well protected as high street banks and building societies. However, just as with any bank or building society, savers should be diligent before opening a savings account to ensure that there is a way of contacting the bank in case any issues occur with their deposits.

Should you choose a challenger bank?

With challenger banks usually offering the best savings rates, especially at a time when rates are falling, they should be considered by savers. Saying this, some challenger banks only offer accounts that can be opened and managed online or, if in-branch banking is available, have very few physical branches. This means that savers will need to consider if being able to bank in branch outweighs their desire to get the best savings rates possible.

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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