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How Challenger Banks Are Changing Personal Finance

Written by Banks Editorial Team

Updated February 14, 2024​

4 min. read​

The banking industry has been evolving over the past few years due to modern financial technology, which has led to the rise of challenger banks. Unlike traditional banks, challengers support remote delivery of banking services, such as the transfer of funds between accounts, check deposits, and paying bills electronically.

Find out how challenger banks work, how they compare with traditional banks and the benefits of banking with a challenger bank.

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What Are Challenger Banks?

Challenger banks are digital banks that harness the power of modern technology to provide customers with the financial services they need, anywhere, anytime. They are considered challenger banks depending on where you live because they tend to compete or challenge big banks using modern financial practices.

Digital challenger banks typically have no physical branches, and all banking services are offered through mobile apps. This allows them to save on the maintenance costs of having a physical presence while providing online banking services. With digital banks, users can now move money around without having to visit a brick-and-mortar bank.

There are several different types of challenger banks, including:

  • Mature challenger banks: As the name suggests, these are digital banks that have been in the mainstream for a while and have gained a reputation. Examples of mature challenger banks include Starling Bank, Monzo, and Revolut.
  • New challenger banks: These are banks that have been operating for at least three years.
  • High street challenger banks: These are digital challenger banks that are offshoots of larger traditional banks. They tend to avoid the competition between high street banks (retail banks) and challenger banks.
  • Shari’a challenger banks: They operate under the rules and regulations of Islamic finance.

What Is An Online-Only Account?

An online-only account is simply a bank account that you can manage using a computer or a mobile device. Typically, online-only banks provide nearly all banking services, including transferring money, depositing checks, setting up automatic payments, and paying bills online.

Online-only accounts are also offered by brick-and-mortar banks, which provide banking services online and in person. However, you won’t interact with a banker face-to-face with online-only accounts, but you can talk to a customer service representative through live chat, email, or telephone.

The Rise of Challenger Banks

While there are challenger banks worldwide, they’re prevalent in the U.K. This is due to the 2008 financial crisis when many people lost money and lost faith in established financial institutions. After the crisis, the U.K. government responded with flexible regulations regarding banking licenses, which were too expensive and time-consuming to obtain.

The flexible regulations combined with the high demand for online banking from consumers led to the rise of challenger banks. In addition to that, the Second Payment Services Directive (PSD2) legislation ushered in a new era of open banking, and widespread technological innovations have made it easier for fintech startups to thrive.

Since then, the banking sector has experienced a major global shift as the rise of challenger banks become increasingly popular and now formidable competitors to traditional banks.

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Challenger Banks vs. Traditional Banks: How Are They Different?

Unlike traditional financial institutions that offer in-person banking, challenger banks are digital-only banks that provide financial services via computer and mobile apps. The main priority of these banks is to challenge or compete with traditional banks by providing an improved user experience.

The main difference between challenger and traditional banking is that digital challengers exclusively operate online, meaning they lack a physical presence. On the other hand, traditional banks have physical locations where you can visit and conduct your transactions.

Since challenger banks don’t have maintenance costs of physical branches like traditional financial institutions, they tend to charge low fees, and others even offer fee-free transactions. This makes challenger banks more appealing to consumers.

Is Your Money Safe With A Challenger Bank?

Challenger banks can be considered safe since they’re protected by the Financial Services Compensation Scheme (FSCS). If the digital bank becomes insolvent, you’re covered up to £85,000 per eligible deposit account.

If your provider isn’t a bank, you’ll probably have an e-money account licensed by the Financial Conduct Authority (FCA). FCA is a financial regulatory body in the U.K. responsible for safeguarding deposit accounts.

The safety of your money comes first when banking with any financial institution. Before you bank with a challenger bank, it’s crucial to check if the institution is licensed.

Benefits of Banking With Challenger Banks

Banking with a challenger bank comes with several benefits:

Seamless Mobile Banking Experience

Digital-only banks offer a seamless mobile banking experience that traditional banks do not. Whether you want to transfer funds between accounts, deposit a check, or pay bills, you can perform nearly all transactions electronically, anywhere, anytime. With the mobile app, you can also receive real-time spending alerts and push notifications when your paycheck arrives.

Higher-Interest Savings Account

Not only do they improve user experience, but most challenger banks also offer high-interest savings accounts. While annual percentage yield (APY) varies from one provider to another, they’re generally higher than those offered by traditional banks.

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Financial Management Features

Challenger banks use modern financial technologies to offer services beyond regular banking. Apart from checking and savings accounts, it also provides financial management features like budgeting tools that can help you build good spending habits.

More Diversified Services

Challenger banks are better known for their cutting-edge technology. They harness modern financial technologies to offer more diversified services to consumers. Banking with a challenger bank is far off from just spending and saving. You can also invest and let your money work for you.

Better Value and Rewards (including Cashback)

You can also earn cashback rewards whenever you make purchases using a credit card from digital challenger banks. Cashback rewards vary depending on the challenger bank you open an account with. Generally, it is a percentage of every qualifying purchase from a merchant.

Transparent Fees

Although challenger banks charge lower fees and interest rates than traditional banks, there are no other hidden fees. Some don’t even have minimum overdraft fees, and others offer fee-free transactions. It’s vital to read the fine print of the terms, though, before opening an account.

Safe and Secure

Challenger banks are safe and secure, just like opening an account with a high street bank. Challenger banks are licensed by FSCS, which covers up to £85,000 per eligible person in the U.K. In addition, some digital challengers that offer e-money accounts are protected by the FCA.

How to Open an Account With a Challenger Bank?

The process of opening an account with a challenger bank varies depending on the provider. Generally, it will take you minutes to have your account up and running because of modern financial technology.

All you need to do is fill out a simple online application form with your personal information to download the mobile app. The challenger bank will then verify your account by requesting a selfie or a video of your ID, usually a driver’s license or passport. They’ll also need to verify your address by submitting a utility and tax bill. If everything meets the requirements, you can start managing your account immediately.

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Is There a Better Alternative?

Current is a financial technology company that offers a broad range of money management services. You can spend and save using the Current mobile app. Here are some of the reasons why you should choose Current:

  • Seamless mobile money management experience
  • No hidden fees
  • No overdraft fees of up to $200
  • Early direct deposit
  • Earn up to 15 times cash back rewards on everyday purchases
  • Earn up to a 4% bonus on your savings

Get started with the Current mobile app today and enjoy the benefits.

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