Published: 01/03/2019

At a glance

  • A challenger bank is typically a smaller, recently launched bank that aims to challenge the dominance of the long-established banking giants.
  • They tend to offer the better savings rates available.
  • Many challenger banks focus on online accounts.
  • They must abide by the same rules and regulations as any bank.

They regularly top the savings charts and tend to have a reputation for offering great service, too. But what is a challenger bank, and can they be trusted as an alternative to the established banking giants?

The definition for a challenger bank is a relatively small retail bank set up with the intention of competing for business with large, long-established national banks (Oxford Dictionaries).

The history

It was a battered and bruised banking sector that emerged from the 2008 financial crisis that it was pivotal in creating. But with trust in the old banking guard somewhat dented, it became apparent that there was an opportunity for a new wave of financial institutions to make their mark, and it is one that an ever-growing number of so-called challenger banks have attempted to grasp.

Their rise

In essence, challenger banks are the ones that are trying to knock the big banks off their perch. Some challengers will be more established (and familiar) than others, with TSB, which returned to the high street in September 2013, being a good example.

At the same time, there is a growing band of truly new start-up banks that are trying – and succeeding - in making themselves known. Metro Bank, for instance, became the first institution in over a century to gain a full banking licence in 2010, and now has 60 branches to its name.

Other challengers you may (or may not) have heard of include Aldermore, Al Rayan Bank and Bank of London & The Middle East, continuing all the way through the alphabet to Virgin Money, Wyelands Bank and Zenith Bank (UK) Limited.

A new way of banking

With competition in the banking sector a priority for regulators, more new names can be expected, and if their predecessors are anything to go by, it is savers who stand to benefit. Crucially, the challenger banks need customer deposits to build their balance sheets, which is why they are usually willing to offer better rates than their more established counterparts.

Many of the challenger banks focus their attention on online offerings, so don't expect to see many of them on the high street (the likes of TSB, Metro Bank and Virgin Money being the exceptions). This helps to keep their costs down, meaning they can hopefully offer better rates.

For those who are comfortable banking online and via their mobile phone, this is obviously not an issue. And for the people who still prefer to bank face-to-face in a branch, many challengers still offer ways for people to pay in money at a counter (through partnerships with other banks, for example).

Give them a chance

Some people will have reservations over using a challenger bank because of their fledgling status, but it should be remembered that they must abide by the same rules and regulations as their more established counterparts. If we list them, your savings will be protected, whether that is under the Financial Services Compensation Scheme or a similar protection scheme, meaning your money will be just as safe with a challenger bank as anywhere else.

It should also be remembered that the vast majority of challenger banks are untainted by the financial crisis and have not been caught up in the PPI scandal. They are coming to the market with a clean slate and a reputation that is ripe for building.

Put all of this beside the better rates and superior service that challenger banks tend to offer, and there really is little reason not to give them a chance.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

bank with a purple background

At a glance

  • A challenger bank is typically a smaller, recently launched bank that aims to challenge the dominance of the long-established banking giants.
  • They tend to offer the better savings rates available.
  • Many challenger banks focus on online accounts.
  • They must abide by the same rules and regulations as any bank.

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