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A Closer Look at the Evolution of Challenger Banks in Europe

Challenger banks exist to disrupt incumbent firms, those high street banks as we know them, and provide personal and efficient banking experiences. 

After the financial crash in 2008 UK financial regulators encouraged more competition into the UK banking sector. The 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, Virgin Money and Zenith Bank.

In the UK especially, the introduction of instant payments and access to the faster payments system was a real catalyst for the challenger bank creation believes Alistair Brown, Head of Global Payments, EPAM Systems, Inc.

He said, “The rise in instant payments and the appearance of the challenger banks are parallel threads in the same pan-European story, both developed to encourage increased competition in European financial services.

“The UK Treasury’s Cruikshank Report produced the early UK Faster Payments system, just as the EU wrote a series of directives, driving openness in banking and improved customer protection through SEPA PSD2 XS2A, which can be traced back to the Lisbon Agenda. Both reported definitively in March 2000.”

Are Challengers successful?

In terms of the success of Challengers in January this year, Revolut had more than eight million customers worldwide, whilst Monzo reported it was gaining 55k new users each week. And Starling reported that it was the first Challenger Bank to make a profit in the UK.

Yet according to data from the personal finance app Plum, 91% of Plum customers are still opting for traditional banks over neobanks like Monzo, Revolut and Starling. It appears that women are mainly choosing traditional banks, with only 34% of those that do use a challenger as a primary account being female. And overall, take-up of challenger bank paid tiers among Plum customers remains low – just 27% for Revolut Premium and 9.8% for Monzo Premium.

But regardless of take-up, the model of a Challenger Bank is something that is here to stay.

Inside a Challenger Bank

Over in Belgium, Aion Bank is a full-service digital bank that is designed to help members save and earn. It combines the best in neobank technology with the breadth of services and guarantees of a traditional European bank. Consumers like the user experience and convenience of digital banks, but the current players are limited in their offer – since launching, Aion offers daily banking alongside business banking, lending and ETF asset management and has more than doubled its membership across the past 12-months and is now available in 16 countries.

Kim Van Esbroeck, Country Head, Aion Bank Belgium said, “Our vision was to create an alternative to the system hidden fees and cross-sell of the traditional banking sector. The challenge was to offer something that was fully transparent and truly put the customer’s interests first. We knew freemium wasn’t an option for us because this still relies on cross-sell for revenue growth, so we created a subscription banking model.

“We offer all-inclusive banking for both individuals and businesses. Our retail product includes a complete package of daily banking products, multi-currency accounts, currency exchange at interbank rates, international transfers, superior interest rates on savings accounts, competitive rates for loans, personalised financial advice, commission-free ETF asset management, and a combination of smart tools to help members save on household bills, all for one fixed monthly price.”

While B2C is a strong sector when it comes to Challenger Banks, more are tackling the B2B market, for Aion in particular, that means combining their suite of daily banking products with smart tools for invoicing and borrowing available up to 1 million euros. Kim adds, “We strongly believe in the post-Covid revival of SME lending, which we already offer as a complete in-app solution. We will also be opportunistic with acquisitions that enhance our product offer – ETFmatic is a perfect example of this.”

An influx of East and West Challengers lies ahead

And of course, as JP Morgan’s Chase looks set to open in the UK after huge success across the pond, and Turkey’s Papara gears up for an e-money license, the Challenger Bank pool will only become more wide.

In January it was announced that the new digital bank will use Chase brand, headquartered in London with a contact centre in Edinburgh. The business has already created over 400 jobs in the UK and is planning additional hires as the business grows. Launch of consumer-facing bank will deepen JPMorgan Chase’s commitment to the UK and its communities.

And in November 2020 Papara, the Turkish banking challenger which has grown to 8 million users in its home country, revealed that it is gearing up for European expansion in 2021. The fintech is currently applying for an e-money licence in Lithuania, its first point of expansion and targets Turks who live and work across Europe. Germany will follow next, a country home to four million Turks – the largest concentration outside of Turkey. Papara launched in 2016 and became cash flow positive in 2017, finishing the year with a profit. In 2019, the start-up turned over a profit of $20 million and are projected to hit $50 million by the end of the year.

What’s next for Challengers in Europe?

With the release of the EU Digital Finance and Retail Payments Strategies in late 2020, the European FinTech Association (EFA) believes that there is now a clear step forward to be taken in “tearing down these barriers and completing the Digital Single Market for financial services.”

Marc Roberts, Chairman of the EFA Board said “delivering the EU Single Market and removing cross-border barriers for financial services is at the heart of the EFA’s goals and we welcome today’s publications on a Digital Finance and Payments Strategy. We very much welcome the Commission’s focus on the digital identity in this regard. We further believe in customer-centric regulation, to build a fairer and more accessible financial services landscape and are looking forward to working together with the European Commission and other stakeholders to make this a reality in the near future.”

With Challengers finding a welcome home in Europe and digital pathways expanding to make open access across financial markets even better, interoperability will become key for those that want to remain a success across this key fintech sector.

Author

  • Gina is a fintech journalist (BA, MA) who works across broadcast and print. She has written for most national newspapers and started her career in BBC local radio.

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