UK Challenger Banks

Part
01
of two
Part
01

UK Challenger Banks: Market Overview

According to Banking Tech, there are 102 challenger banks in the United Kingdom as of February 2019. Key players in the UK challenger banks market include Monzo, Revolut, Starling Bank, Atom, and N26.

UK Challenger Banks: Market Overview

Players

  • According to Banking Tech, there are 102 challenger banks in the UK as of February 2019.
  • Key players in the UK challenger banks market include Monzo, Revolut, Starling Bank, Atom and N26.
  • Top six SME challenger banks control about 10.2% of the market.
  • In the SME challenger banks segment, top 6 SME challenger banks in the UK based on the number of business current accounts include CYBG (190,000), TSB (100,000), Metro Bank (100,000), Co-operative Bank (90,000), Tide (85,000), and Starling Bank (30,000).

Funding Raised by Key Players

UK Challenger Bank Market Growth Dynamics

  • According to KPMG, the UK has the most number of challenger banks on account of unsaturated nature of traditional banks and early adoption of digital banking.
  • According to Accenture, challenger banks in the UK are growing.
  • Further, challenger banks would continue to grow as additional £775 million would be provided under the Alternative Remedies Package to promote competition in the small and medium-sized enterprises (SMEs) market.
  • The UK challenger bank industry has grown at a steady pace over the past five years on account of facilitating medium to small size entrepreneurs and full adoption of digital and mobile services.
  • According to KPMG, the balance sheets for small challenger banks grew by 22.5% in 2016.
  • According to KPMG, the balance sheets for large challenger banks grew by 7.8% in 2016.

Users of Challenger Banks

  • According to a study conducted by Censuswide, 1 in 4 millennial and Generation Z demographic groups in the UK use digital-only challenger banks.
  • Further, 14% of all the UK bank customers have at least one mobile-only digital banking provider.

YOUR RESEARCH TEAM APPLIED THE FOLLOWING STRATEGY:

We garnered most of our data from sources such as KPMG, Accenture, Trade Finance Global, AltFi, Learn Bonds, FStech, Telegraph, and Wired. Key players were determined based on analyzing some of the aforementioned sources. Some of the key players were mentioned repeatedly in several sources and they have been presented in this brief.
Part
02
of two
Part
02

UK Challenger Banks: Challenges

Some of the biggest challenges that challenger banks in the UK are currently facing are online/tech issues, source of funding, and customer trust.

#1: ONLINE/TECH ISSUES

  • After spinning out from Lloyd bank, customers of TSB, a UK challenger bank, faced access problems for almost two weeks because of its crumbled online platform. This incident impacted 1.3 billion customer records.
  • Similarly, Monzo also faced technical issues which caused delays in bank transactions.

SOLUTION:

  • Challenger banks are addressing technical issues by upgrading their technology.
  • TSB collaborated with IBM to provide data integration and MicroStrategy data exploitation, as well as Teradata, for data acquisition.
  • Similarly, Monzo focuses on Faster Payments Gateway, which enables them to avoid dependence on a third party to handle transactions to address technical issues.

#2: SOURCE OF FUNDING

  • Bank of England has blocked its two funding schemes, TFS and FLS, which has made a massive impact on the source of funding for challenger banks which borrowed around 25% (£29.5 billion out of £121.3 billion) of TFS funds.

SOLUTION:

  • Challenger banks are checking out alternative sources of funding such as crowdfunding and financing from RBS.
  • Dozens have secured around £3.8 million from 2,156 investors across 42 countries.
  • Key players like Metro (£120 million), Starling (£100 million), and ClearBank (£60 million) got funds from RBS with an agreement to support small and medium-sized companies.

#3: CUSTOMER TRUST

SOLUTION:

  • Challenger banks are building new strategies for attracting customers, such as designing friendly mobile apps and encouraging customers to become stakeholders.
  • Most Millennials are focusing on challenger banks as banks like Monzo and Starling offer personalized savings goals tools, which help customers to save money, thereby gaining customer trust.
  • Monzo is increasing customer loyalty by collecting feedback on product launches, organizing 8-12 events for customer interaction, and also allowing customers to become stakeholders.

RESEARCH STRATEGY

The research team began by searching for information on some of the biggest challenges that challenger banks in the UK are currently facing and were able to locate few problems from reputed challenger banks reports and press releases from KPMG, PWC, Deloitte, ATM Marketplace, and Finextra, among others.

Based on the challenges mentioned across the above reports, we then searched through case studies and news articles available on Financial Times, TechCrunch, Telegraph, The Conversation, Monzo, Tandem, and N29 for information on the tactics used by challenger banks in the UK to overcome those hurdles and relevant results.

We regarded the garnered challenges as "biggest" as they are industry-wide challenges, affecting multiple players in the industry as well as their users at a large scale. For example, technical issues in challenger banking are considered as "biggest" challenge because challenger banks mostly rely on online-only operations, and multiple banks, face these technical issues numerous times.


Sources
Sources

From Part 01
Quotes
  • "The number of UK challenger banks now sits at 102, according to Banking Tech’s most recent analysis updated in February 2019."
Quotes
  • "Top players such as Monzo, Revolut, Starling Bank and N26 are all splashing out on glossy marketing campaigns aimed at winning new customers."
Quotes
  • "The horsemen of the fintech revolution, however, are digital natives, with Monzo, Revolut, N26, Atom and Starling Bank in the lead. "
Quotes
  • "An AltFi analysis today reveals that collectively the top six SME challengers control 10.2% of the market."
Quotes
  • "Over the past year, so-called challenger banks and neobanks have been making headlines by attracting big venture capital investments. "
  • "Britain’s Monzo raised US$93 million in November 2017[1], building on a $27.5-million financing round during the first quarter. "
  • "Earlier in the year, Atom Bank, a fellow UK challenger, pulled in a total of $140 million.[2] A third British startup, digital-only Starling Bank, announced in September that it was raising $54 million in fresh funding"
  • "Most challenger banks and neobanks are in the UK, for two reasons. First, Britain isn’t as saturated with big banks and their branches as a nation like the US, creating an opportunity for non-traditional financial institutions. "
  • "Second, the UK was an early adopter of digital banking, dating back to the dotcom era of the late 1990s and early 2000s. That head start has probably helped it lead the shift toward challenger banks and other alternative models."
Quotes
  • "Challenger banks in U.K. are also growing and an additional £775 million will be provided under the Alternative Remedies Package to promote competition in the small and medium-sized enterprises (SMEs) market."
Quotes
  • "U.K. Challenger bank industry has been growing at a robust past pace over the past five years, driven by their strategy of facilitating medium to small size entrepreneurs along with the full adoption of digital and mobile services."
Quotes
  • "But there is little evidence of a slowdown in their growth, with the small Challengers growing their balance sheets by £8.6 billion, up 22.5 percent over 2015. "
  • "The large Challengers have accelerated balance sheet growth from 2015, to 7.8 percent."
Quotes
  • "One in four people under the age of 37 - those in so-called Millennial and Generation Z demographic groups - are using digital-only challenger banks and 14 per cent of UK bank customers across all age groups have at least one mobile-only digital banking provider – with up to a third of under 37s having two or more accounts with challenger banks."
  • "This is according to an independent study undertaken by Censuswide on behalf of Crealogix in November, interviewing 2,000 18-65 year olds who currently have a bank account."
  • "It also suggested that newcomers are picking up market share at a rapid pace."
  • "The most popular mobile-only digital challenger banks were found to be Starling, Revolut and Monzo - Monzo being the most popular for the under 37s."
From Part 02
Quotes
  • "While TSB has been operating independently of Lloyds since the split, it was still relying on Lloyds’ IT systems until recently, when it finally migrated to its own system to an initial cheer. But it couldn’t have gone much worse for TSB, as its new online platform crumbled under the amount of users it had to handle, leaving many without access to their accounts for over two weeks. Its chief executive Paul Pester has forfeited a £2 million bonus, waived overdraft fees, raised interest rates on current accounts and promised that no one will be left out of pocket as a result of the ordeal."
Quotes
  • "TSB added that Teradata would support data acquisition, IBM Infosphere would provide data integration, and MicroStrategy data exploitation, while the LinkedIn profile of someone working on the integration for TIBCO gives further hints of the technologies the platform is based on."
Quotes
  • "Customers have faced a week with no, or intermittent, access to their accounts, following a migration of some of the bank's services to a new platform, which involved moving 1.3 billion customer records. "
Quotes
  • "The two Bank of England funding schemes, TFS and FLS, have provided access to cheap funding for challenger banks since 2016 and 2012 respectively. The closure of both schemes in early 2018 and the four year pay-down period will push challengers to look for new sources of liquidity to repay the borrowings over the coming years. This has served to further increase the competition for retail deposits"
Quotes
  • "New challenger bank Dozens has secured £3.8 million in funding through a crowdfunding campaign on European investment platform Seedrs."
  • "Dozens set their funding target on Seedrs at £3.5 million, but it exceeded its goal bringing onboard 2,156 investors from across 42 countries."
Quotes
  • "Three UK ‘challenger banks’ have been granted a total of £280 million as part a larger Royal Bank of Scotland fund."
  • "It is awarding London-headquartered Metro Bank £120m, app-based challenger bank Starling £100m and ClearBank, which was set up by FinTech entrepreneur Nick Ogden, £60m."
  • "The funds have been granted on condition that they are spent on improving the financial products and services available to small and medium-sized companies."
Quotes
  • "Neobanks and challenger banks are on the rise, but don’t look for them to supplant traditional financial institutions anytime soon. In addition to big client bases, traditional financial institutions have a brand advantage that connotes trust."
Quotes
  • "The company grows its customer community by making it a stakeholder in the business "
  • "Monzo asks customers for feedback on product launches and fees, allows them to invest in the company through equity crowdfunding rounds and holds community events across the U.K., either at Monzo offices or customer suggested venues. "
  • "The company’s biggest growth driver is loyalty, with word-of-mouth referrals being the source of 80 percent of new customer growth, according to the company. "
  • "Monzo also includes crowdfunding rounds that let customers become shareholders in the company. The company has held two equity crowdfunding rounds since its founding, with a $1.4 million round two years ago and a $3.5 million million round last year."
Quotes
  • "App-only banks such as Monzo and Starling offer an array of tools to categorise, chart and monitor your spending month by month. Both apps offer personalised savings goals — could it make it easier to save if you’ve identified specific targets, such as a festival ticket or new sofa?"
  • "Bridie Murphy, 22, a teacher from Manchester, said she favours Monzo over traditional banks because it immediately updates her current account if she makes a contactless payment, making it easier accurately to track her bank balance. “Monzo is more user-friendly than my old Santander banking app, and it was so little effort to get it,” she said"
Quotes
  • "digital banking platform reported that on May 30th, around a quarter of bank transfers into Monzo accounts were failing or delayed by several hours and bank transfers from the Monzo accounts were delayed by a few minutes"
  • "We’re continuing with a project to bring our Faster Payments Gateway in house, so we don’t have to depend on a third party to handle bank transfers. This is a fairly large project, with long timescales. This kind of project usually takes over six months, from starting to going live. Fortunately, we started this process several months ago, when we experienced a number of smaller-scale incidents. We’re estimating that we’ll switch to our own Faster Payments Gateway in November 2019"
Quotes
  • "While challenger banks increase their customer base and market presence, the number of customers using these banks as their main bank and having their payroll registered to them is low."
  • "The main reason for this is trust. Trust is of paramount importance when it comes to where customers put their money, and here established banks seem to have the upper hand."