What are Challenger Banks? | moneyfacts.co.uk

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Michelle Monck

Michelle Monck

Consumer Finance Expert
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 better savings rates.
  • They must abide by the same rules and regulations as any UK authorised 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?

Challenger banks are often thought of as smaller retail banks set up with the intention of competing for business against the larger and long-established national banks.

All challenger banks are authorised by the Prudential Regulation Authority and this means they are also covered by the Financial Services Compensation Scheme (FSCS).

There is a range of different types of challenger banks:

  • Challenger banks with a high street presence, such as TSB, Virgin Money and Metro Bank.
  • Sharia’a banks , including Bank of London and The Middle East (BLME), Al Rayan and Gatehouse Bank.
  • Challenger banks focussed on commercial lending, such as Shawbrook Bank, Aldermore and One Savings Bank.
  • Digital challenger banks, Atom Bank, Monzo and Starling Bank.

Digital challenger banks

Challenger banks often embrace new financial technologies as a way of improving service to their customers. Some, for example, have no physical high street presence at all and instead rely on phone, app and online banking. This allows them to avoid the high costs of maintaining a branch network and makes them ideal for customers who prefer to bank in this manner.

Digital-only bank accounts

Find out more about how digital-only banks and mobile banking apps work in our guide to the best digital-only banks .

What types of challenger bank are there?

There are quite a few challenger banks out there – some of whom have been around for a while and others that are fresh onto the market. In addition, there are challenger banks that are appearing along the high street and Sharia’a banks that operate on Islamic finance principles.

Mature challenger banks

While the term ‘challenger banks’ was originally used to denote a provider that was new to the market, there are a number that have now been established in the market for quite a few years. Among these are names such as first direct and TSB . Both are mature organisations and, in the case of first direct, have been around for long enough to be considered as mainstream as many other larger banking institutions. Indeed, first direct was the first bank to operate in the UK with no physical branches – the success of which paved the way for many of the later challenger banks entering the market.

New challenger banks

Typically operating for around three years or less, these are the new entrants to the challenger banking market. With these banks comes a fresh, new approach to providing banking services and these are often firms where customers can enjoy the latest innovations.

However, their newness and fresh approach does not in any way imply that they are yet to be established as a force to be reckoned with. As is often the case with challenger banks in general, these are often the places offering the best deals and most attractive interest rates.

Banks in this category include names such as Monzo Bank, Tandem Bank and Starling bank .

High street challenger banks

Some challenger banks have bucked the trend of avoiding branches and are competing with the high street banks on their own terms. Some, such a Metro Bank, are new to the UK market while others – like Virgin Money and TSB – are offshoots of larger banks. Virgin Money emerged from the old Norwich Union Insurance group and expanded by acquiring Northern Rock building society’s mortgage book, while TSB is an old brand that has been revived by the Lloyds Banking Group decades after the name disappeared in 1996 .

Sharia’a challenger banks

Of the four broad categories, it’s fair to say that Sharia’a banks encounter the most confusion and lack of understanding from consumers in general. Very basically, Sharia’a banks are run in accordance with the principles of Islamic finance. This covers two elements: ethical banking and the charging of interest.

What are the differences between challenger banks and high street banks or building societies?

Challenger banks compare very favourably with traditional high street banks and building societies, especially for those customers who are happy to bank online or via a smartphone app. Often, challenger banks offer higher rates of interest on savings accounts and better levels of customer service.

Will I get a better interest rate with a challenger bank?

While interest rates are rarely static for long, it is often the case that challenger banks – with their streamlined operations and lower running costs – can offer better savings rates than their high street counterparts.

For example, let’s look at the average rates for one-year fixed rate bonds in May 2020*:


Product Count

Lowest AER

Highest AER

Average AER

High Street Banks





Challenger Banks





 * - Data from the Moneyfacts Treasury Report May 2020

From the above snapshot, it is apparent that during this period, challenger banks not only provided a wider range of products but also offered significantly high rates of interest than high street banks.

Better service from a challenger bank?

Published quarterly, the Financial Conduct Authority’s (FCA) customer service statistics make it easy to compare how well banks and building societies perform against a set of standard banking activities. This includes things like how long it takes to open a new account, get access to online banking or to replace a lost debit card, for example.

Challenger banks often perform very well in these surveys, offering a faster response than their larger competitors and showing higher levels of customer satisfaction.

To see the results of the latest FCA survey, click here .

Why did challenger banks come about?

The UK financial regulators encouraged more competition into the UK banking sector following the financial crash in 2008. Their aim was to reduce the hold the biggest UK banks had on the market, estimated to be as high as 87% of all current accounts in 2017.

Metro Bank was one of the first challenger banks and had its banking licence approved in 2010. Since then, numerous other new banks have been awarded licences including Aldermore, BLME, Virgin Money, Wyelands Bank and Zenith Bank.

Challenger banks are growing in popularity, but still have some way to go before they rival the market share of the larger, more established banks.

List of current challenger banks*

*- Correct as of 22.10.2020

  • Al Rayan Bank
  • Aldermore
  • Allica Bank
  • Atom Bank
  • Bank of London and The Middle East (BLME)
  • Charter Savings Bank
  • Cynergy Bank
  • DF Capital Bank
  • Ford Money
  • Gatehouse Bank
  • Hampshire Trust Bank
  • Ikano Bank
  • Investec
  • JN Bank
  • Marcus by Goldman Sachs®
  • Masthaven Bank
  • Metro Bank
  • Monzo
  • OakNorth
  • Paragon Bank
  • PCF Bank
  • RCI Bank UK
  • Secure Trust Bank
  • Shawbrook Bank
  • Starling Bank
  • Tandem Bank
  • TSB
  • Virgin Money
  • Wyelands Bank
  • Zopa Bank

Expect more challenger banks

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.

For those who are comfortable banking online and via their mobile phone, the choice of banking providers will likely continue to grow. Meanwhile, 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 or the Post Office, for example ).

Moneyfacts tip

Moneyfacts tip nigel woollsey

Don’t get confused between an authorised challenger bank and an electronic services provider offering banking services. The latter can offer you full banking services but will not be protected by the FSCS. If in doubt, look for their registration details on their website.

Pros and cons of challenger banks

  • By taking advantage of the latest technology, challenger banks often lead the way when it comes to the speed of customer service.
  • They afford the same level of savings protection as high street banks, so your money is just as safe.
  • With lower operating costs, they very often offer higher rates of interest than high street banks.
  • Some have arrangements with other banks or the Post Office to facilitate making deposits for those who need to use a physical branch.
  • You can still withdraw cash using a debit card from thousands of ATMs as you would normally.
  • Cheques can often be paid in using a smartphone banking app.
  • Not all have physical branches for those who still prefer dealing with their bank face to face.

Moneyfacts tip

Moneyfacts tip nigel woollsey

For those comfortable with new technology and online banking, challenger banks may offer significant benefits over high street banks. Compare bank accounts and see for yourself.

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.

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 better savings rates.
  • They must abide by the same rules and regulations as any UK authorised bank.


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