Challenger banks are what they say on the tin: a challenge to traditional banks. They pose as a challenge, or a threat because they’re up and coming with a different approach to banking.
By nature of being rebellious, they’re young businesses. They threaten the status quo of banking because they offer a new take on banking procedures, infrastructure and services. Generally, you’ll find much cheaper currency exchange fees, more tech-heavy usability and much faster sign up processes.
Start-ups in this field have a very good understanding of what ticks us off about traditional banks, and they’ve engineered a way to overcome such bureaucracy, high priced and ancient UI.
With incredibly easy sign-ups, super speedy transactions and innovative technology, it’s not difficult to see why they’re on the rise. There’s no doubt that traditional banks are becoming extremely weary of this trend, and it may be the threat they need to evolve a stuck-in-the-past, complacent service.
How popular are challenger banks?
To no surprise, there are a growing number of challenger banks. Of course, they’ve not replaced traditional banks in either quantity or userbase (yet?), but they’re on the rise nonetheless.
What’s interesting though, is that this has been the story in Europe. In America? Not so much.
They’re popular in most of the world in fact, particularly in Europe in places with a strong fintech scene. London is perhaps the birthplace of the most prominent challenger banks, with Monzo, Starling and Tandem being situated there. With a 5 minute in-app sign-up process, these are becoming extremely popular and seem to be slowly replacing traditional banks.
It’s strange then that the US hasn’t really welcomed them with open arms, and haven’t been producing many themselves. It’s thought that US companies are focused on payment solutions instead of bank accounts, as they have more scope for profits and fewer regulations. This surely applies to most countries, though.
The real answer lies in the distrust of startups. In Germany and the UK, customers don’t think twice about trusting fintech’s with their money, in conjunction with having faith in government-backed deposit protection regulations. Americans it seems don’t have the same trust.
It seems that although payment startups are trusted, a little more time (or value offered?) is needed for mobile banks.
Despite this, one of the largest challenger banks, N26, has launched into the US (with 100,000 wait-listed US customers ready to pounce), along with Monzo set to enter the US too. There already some domestic US challenger banks to choose from, although they’re certainly not in their stages of maturity yet.
The advantages of challenger banks
The thing that challenger banks have over traditional banks is their lack of infrastructure. This sounds like a disadvantage, but it means they can react faster to changes. Traditional banks have huge sunk costs, with many different departments to attend to, making them always a bit behind. When tech is at the foundation of a business instead of brick and mortar capital, you can be fluid in the market.
The innovation of technology has perhaps been its strongest point so far. The services they provide are highly customizable. You can find yourself creating saving spaces – virtual spaces that are safe from spending. These can be saving pots for different areas of your life, allowing you to budget better.
And it’s secure because you can freeze your card with a simple click in the app, as well as limit certain spending like gambling or ATM withdrawals. There are fewer fees, more transparency, and an overall feeling of clean efficiency because they don’t have their hand in a million different departments.
The largest benefit for small companies and those who like to travel is the cheap fees of challenger banks. For Americans (and Europeans), N26 is one of the strongest options. If we take them as an example, then for no monthly account fee, you can benefit from free card payments in any currency. This is profoundly advantageous, and completely embarrasses traditional banks which charge flat fees on top of huge 4% currency spreads on any foreign purchase.
And with many challenger banks, you can also withdraw from a foreign ATM for no extra cost, and receive a second-to-none exchange rate. This on its own is what sets them apart, and is the reason why expats are in love right now. Many companies (such as Transferwise in the UK) even go as far to call their debit cards as “borderless cards”, because that’s exactly what they are – complete and utter frictionless foreign spending and money transfers.
For many users, it can be difficult to author some drawbacks of using them. Of course, though, the reality is that nothing is perfect.
Firstly, they’re smaller companies. This smaller, more malleable infrastructure is their greatest asset, but it also means they’re less reputable. They feel less safe. They’re of course fully regulated, but their smallness means they might not inspire credibility.
They’re somewhat limited too. Many people like dealing with one entity and building a relationship with them. Traditional banks may have debit cards, credit cards, mortgages, various savings and student account and so on. Challenger banks are very much for one job and whilst they do it well it may not be suitable for those who want to go in-store, build a relationship and rely on them for all financial aspects of their life.
Personal preference is one thing, but what’s important here is that it’s important for the US to be more accepting of challenger banks. Choice is at the core of free America, and what better way to increase that than to threaten traditional banks with innovative technology?