November 4, 2020

Only 3 of the top 10 challenger banks by valuation are real banks

Challenger banks, as a result of the advent of Fintech, have been increasing in numbers in recent years. In fact, currently, there are about 100 challenger banks worldwide, offering different types of financial services to a poll of consumers whose banking preferences have shifted towards simpler, more transparent and digital ways of managing money.

These shifting consumer preferences and the challenger banks’ adequacy to cater to them is reflected in investors’ interest in these platforms. Just in 2019, challenger banks struck 138 deals, receiving a record $5.3 billion in equity funding.

Today, more and more people have accounts on challenger banks – in many cases, in more than one – and many customers treat these accounts as their primary ones, even receiving their salaries in them. This raises the question of whether incumbents could ever be replaced by challenger banks.

However, the word “bank” can sometimes be misleading, and quick research on the top 10 challenger banks by valuation has highlighted the reality of the nature of these so-called “banks”.

Only 3 out of the top 10 challenger banks are real banks

Table displaying that only 3 out of the top 10 banks by valuation are real banks: N26, OakNorth and Monzo

Only 3 out of the top 10 challenger banks are real banks

In order to judge our findings, we should start by defining what a bank is. A bank is a financial institution licensed to receive deposits and make loans. Out of the top 10 challenger banks, only N26, OakNorth and Monzo fall under this description. The other 7 are not real banks. It is for this reason that most challenger banks describe themselves as fintechs and personal finance apps. 

This can be confusing for many users who might believe they are putting their money in a bank, only to later discover that the application they are using is really just a personal finance app or a digital payment service provider. 

However, this doesn’t seem to bother customers. Combined, the top 10 challenger banks account for over 68.7 million accounts!

What is making challenger banks so desirable for customers, even when they are not real banks?

Google any of these challenger banks and you will see in their websites their claim to making finance and managing money easy, transparent and convenient. And it’s true.

Challenger banks attractiveness lies, firstly, in their convenience and ease of use. From opening the account (I opened mine from bed), to moving money around, challenger banks offer an extremely convenient and fast customer experience to manage money.

Secondly, their digital interface is more appealing to younger generations who are used to dealing with just about everything online. It also allows to reach the unbanked as long as they have a smartphone. 

Thirdly, challenger banks have lower or no-fees. This is extremely attractive to just about anyone and especially, once again, to the younger generations.

Lastly, challenger banks are more transparent. They disclose fees to customers so they can have full awareness of how their money is being spent. On top of that, challenger banks usually have blogs where they teach users about the nuances of their products and best finance practices.

When we take this into account alongside the fact that challenger banks – although they may not have banking licenses – are closely monitored and regulated, and ensure their customer’s money, the customer increasing preference for them seems nothing but logical.

Is being a real bank desirable for challenger banks?

The answer is that it depends. Not having a banking license – and thus not being a bank – allows challenger banks to operate more in the way of a fintech company rather than a traditional banking institution, allowing for more flexibility and faster deployment of their products.

At the same time, not being licensed restricts the type of financial products and its features that a challenger bank can offer. Financial products dependant of a license include investment, savings, credit and insurance.

Each challenger bank will have to judge whether obtaining a banking license or not will let them fulfil their promise to the customers of making finance easier. As for the customer, a world of choices is opening in front of us, so if a challenger bank does not provide the services we need, we can choose from the poll of fintechs that do. Opening an account won’t take as long, anyway.


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