What is a challenger bank?

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Digital-first challenger banks have been on the rise in recent years, competing with long-established traditional banks in the UK. In this guide, we’ll talk about what challenger banks are, how they differ from traditional banks, and whether they are safe to use.

So, what is a challenger bank? Challenger banks, often considered part of the broader FinTech sector, are digital-first or digital-only banks that aim to compete with traditional high street banks and building societies by offering more modern, tech-driven services. 

In the UK, online challenger banks are a relatively recent offering - in 2010, when Metro Bank received its licence, there hadn’t been a new UK high street bank for 100 years. Until then, there had been very little competition for the ‘Big Four’ (Barclays, HSBC, Lloyds Banking Group, and NatWest Group). The recent introduction of a number of challenger banks means customers now have more choices than ever.

Challenger banks you may be familiar with include Monzo, Revolut, and Starling; however, there are a number of other UK challenger banks. Based on the challenger bank definition of ‘a small retail bank set up with the intention of competing for business with large, long-established national banks’, here is a list of challenger banks that have received their PRA authorisation to operate in the UK since 2010*:

The main characteristics of challenger banks include:

• Digital-first or digital-only: Most operate entirely online or through apps, with few or even no physical branches available

• Innovative features: Their apps often include money-saving features, instant notifications, virtual cards and spending analytics, among other useful features

• Faster account setup: You can typically open your account within minutes from your phone, with no need to go into a branch or fill in paper forms

• Competitive pricing: Challenger banks often have lower overheads, meaning they may offer higher interest rates on savings accounts or no fees for features such as using your card abroad

As well as the features mentioned above, the main difference compared to traditional banks is that challenger banks usually operate entirely through an app, with no physical branches. 

As a general rule, traditional banks tend to be long-established institutions with a wide range of financial products, for example, savings accounts, loans, and mortgages. They rely heavily on legacy systems and physical branches - although more and more high street branches have closed in recent years, due in part to the rise of online banking.

Meanwhile, UK challenger banks are more recently established (having opened after 2010), and tend to be digital-only, with a focus on convenience and simplified banking. 

The table below compares key features of traditional banks vs challenger banks.

Yes, generally, challenger banks are regulated by the same financial authorities as traditional banks, which in the UK includes the FSCS. This means that your money will be protected up to £85,000 per person, per banking group. 

Some digital challenger banks may also offer additional security features not found with traditional banking apps, for example the ability to instantly freeze and unfreeze your account if you lose (and then find) your debit card, or the ability to check via the app whether a call you’ve received from them is legitimate or a scam. This may give you greater peace of mind when banking online. 

However, some UK challenger banks operate without a full banking licence. They are still regulated, but protections aren’t as strong as they are with a licensed bank - for example, your money may be held in a safeguarded account rather than directly insured with the FSCS. Before opening any new account, you should always read the fine print and check the status of the bank. You can do this by searching for the bank’s name on the FCA’s register.

Whether a challenger bank is right for you depends on a number of factors, including how important it is to you to be able to go into a physical branch or receive face-to-face support, and whether you want to access additional financial services from your bank, for example, taking out a loan with a competitive APR. 

You should always ensure you do your own research to find the best challenger bank for you, but to summarise what we’ve covered on this page, the main advantages and disadvantages of challenger banks are as follows:

• Easy and quick account setup

• Modern banking experience

• Lower fees

• Innovative and useful banking features

• 24/7 accessibility

• No physical branches

• May not offer the full range of financial services and products, like mortgages or business loans

• May not hold a full banking licence

• Customer service may be limited to chat or email, with variable response times

Raisin UK offers a range of savings accounts from both online challenger banks and traditional banks and building societies. Compare savings accounts from more than 40 banks with rates up to 4.40% to find the right choice for you. All the savings accounts listed on our marketplace are either FSCS-protected or the European equivalent, so your money (up to the set amount) is always protected.

*A full list of UK challenger banks can be found on the Bank of England’s website.

**https://www.fca.org.uk/publications/multi-firm-reviews/implementing-technology-change