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MYHSM: Are Challenger Banks Surpassing Traditional Banks?

Challenger and neo banks are acquiring significant market share in the banking world. The Compound Annual Growth Rate (CAGR) of these banking sectors currently stands at 46.5% and it’s only increasing. With that said, what sets challenger banks apart from the traditional banks that are suddenly feeling the heat? John Cragg, CEO of MYHSM, explains.

Challenger banks vs. traditional banks

Firstly, the biggest difference between neo and challenger banks and their incumbent competitors is their physical presence. Neo and challenger banks tend to be entirely digital, cloud-based enterprises that utilise web platforms and mobile applications as their main points of customer contact.

In direct opposition to this, traditional banks are burdened with legacy technology and infrastructure and still take up significant space on the high street. This was an advantage, but the coronavirus crisis has shown these kinds of physical structures are more prohibitive these days than beneficial.

For example, as the pandemic caused lockdowns across the world, challenger banks were relatively unaffected. Their customers were used to managing their finances with an entirely digital-first experience. As a result, challengers can be defined by their flexibility, scalability, and that their customers have a method of banking that better fits their lifestyle.

How challenger banks have grown

The challenger banks currently leading the way include the likes of NuBank, a Latin American start-up that acquired 15 million customers in 2019, Chime, a US neobank which quadrupled it’s valuation in less than a year to $5.8 billion from $1 billion in March 2019 and Revolut, one of the first challenger banks to launch and arguably one of the most well-known challenger brands in Europe which is now valued at $5.5 billion.

However, in the last decade there has been an enormous influx into the market, with other challengers rising in the ranks, including Monzo, Starling, N26, Monese and SoFi to name but a few.

With their flexibility, accessibility and digital nature having ensured they are here to stay, challenger banks have gradually won over customers from traditional banks through a wide range of value-added services and add-ons in addition to un-rivalled customer service.

Furthermore, challengers don’t just provide a current account for users, but they also offer features that help customers with money management, often targeting specific needs of customers that are self-employed, or travel extensively. As well, they tend to target the financial challenges facing SMEs, utilising open banking, banking as a service and PSD2 to provide solutions that far outstretch their traditional banking counterparts.

The impact of COVID-19

Despite their digital-first approach, challenger banks have witnessed declining app downloads this year. Conversely, traditional banks like Lloyds and TSB have seen the opposite and have gained greater interaction with their online banking platforms, not necessarily because customers want to interact digitally but rather they need to during the pandemic. With the convenience of online banking being experienced first hand, this trend is set to continue.

Moreover, there is still a perceived level of safety associated with incumbents which challenger banks have yet to conquer. Customers of challenger banks tend not to deposit large sums of money into their accounts but rather use their card abroad, due to the competitive exchange rates, and for smaller purchases with their ‘spare change’. The global lockdown has abruptly stalled travel plans and small purchases such as eating out, subsequently pausing the growth momentum for challengers.

Are challenger banks acquiring significant market share away from incumbents?

There are currently an estimated 100 challenger banks in operation globally, and traditional banks are feeling the pressure. There is a rising need for traditional banks to develop strategies to minimise the erosion of their place in the market they once dominated. However, legacy banks are relying on there being obstacles to inhibit challenger banks from becoming the primary bank account and financial provider of choice.

For example, certain customers who always used legacy banks will be harder to persuade to switch. Legacy banks already have their roots firmly planted, so challengers don’t just need to convince customers to switch, but they need to implement a differentiated growth strategy while simultaneously not overstretching themselves. Not only this, but they also need to consider how to become financially viable on the trajectory from start-up to scale up and beyond.

The future for challenger banks

Both challengers and neo banks have set certain expectations and standards which are here to stay and will continue to be expected within the banking industry. Not only this, but they could become a formidable presence in the banking space, if they can gain the required confidence, trust and market share which expands beyond millennials and early adopters. If achieved. they have the potential to overshadow the legacy banks that have remained unchallenged for decades.


  • 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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