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April 18, 2019

What is a challenger bank UK and what challenges is it facing in 2019?

By Asena Degirmenci

What is a challenger bank UK? In its most basic form, a challenger bank is a relatively small retail bank built for the purpose of competing with larger, long and well established national banks.

Although these banks are far smaller than the national brands, their purpose is to compete with the Big Four—HSBC, Lloyds, Barclays and RBS. A few resources these small competitors offer include: superior service, better deals, or a combination of the two.

According to Gowling WLG, challenger banks have seen a rapid growth in the last few years and a comparison of pre-tax profits showed an annual increase of £194 million for challengers and a £5.6 billion drop for the big four.

How different is a challenger bank to a national bank?

One key difference to note between a challenger bank and a national bank is that, more likely than not, they have an online presence rather than a physical one. UK challenger banks Metro Bank and Virgin Money are the exceptions with the provision of physical banks.

As more individuals are switching to online and mobile banking anyway, this is not much of a concern for many customers. For customers who prefer to do their banking at a counter, challengers offer ways to satisfy their customers’ needs—for example, through partnerships with other banks.

Challenger banks are also known for offering better interest rates compared to their counterparts, because they still depend on customer deposits in order to build their balance sheets and loan out money.

Challenges challenger banks are facing

Challenger banks are new to the market—essentially, they came into the industry with a clean slate. Bearing this in mind, many people are hesitant to use them as they are not often picked up by the press or as well-known as their competitors.

“Ten years ago, many small businesses were losing a battle for survival as the banking establishment pulled up the drawbridge,” chief executive officer of Aldermore, Phillip Monks, said. “Founded as a start-up in 2009, Aldermore was the first of a new breed of challenger banks to offer a strong alternative and I’m proud of the additional choice we have made available to businesses, homeowners and landlords.”

How challengers operate is based on the customer and their needs. The target audience for these new banks are millennials, which are the driving force behind shifting the financial ecosystem. With millennials, it’s a digital first focus.

Digitization as forward moving as it is, carries some risks for challengers.

Just as any traditional bank, challengers must follow the same protocols. One custom they both follow is risk management.

The development of digital banking reveals banking chief executives have made cyber-security a top priority. Issues regarding the privacy of customers’ information and hacking attacks are more prevalent than ever with these new technological developments.

The progression of challengers will be seen through the advancement of digital banking. New challenges and opportunities will continue to manifest as old and new competitors within the industry evolve.

Monks said challengers often shared similar risks to its more traditional banking peers. “As we await the outcome of the UK’s Brexit negotiations, there is a high degree of uncertainty in terms of the economic outlook. Within this environment, we will continue to focus on maintaining a high-quality diversified portfolio.”

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