Ten years ago you would be hard-pushed to describe a banking experience as fun. Unless you were cashing in an extremely large cheque – and how often did that happen? – it was categorically all a chore: getting there, queuing in a thoroughly grey space, form-filling, wrong-form-filling, queuing some more, being “helped” by a bored, barely-present teller.
But look now. Banks are fresh-faced and forward-looking, their modernity telegraphed by their Very Colourful Cards. Coral! Teal! Rose quartz metal! They’re helpful too, their customer-friendly services including payment categorisation, bill-splitting features and easy ways to save, through “vaults” and “pots” and “goals”.
Such are the on-trend USPs of the digital-only challenger banks. From Metro to Monzo, Starling to Revolut, these are the start-ups revolutionising the banking experience, proving especially popular among Generation Z‑ers and Millennials. According to research conducted by Crealogix last year, one in four people in the UK under 37 uses a digital-only challenger bank, while up to a third claim to have two or more challenger accounts. With banking changing relatively little in the last hundred years, the emergence of these banks is unprecedented. Where did they come from?
The challenger bank may be seen by some as the phoenix which rose from the ashes of the 2008 recession. Historically, four main banks have dominated in the UK.
When the 2008 financial crisis struck, confidence and trust in the Big Four – that is, Barclays, Lloyds, HSBC and Royal Bank of Scotland – wavered. So in 2012, the Government passed the Financial Services Act. It promised to reform financial regulation and facilitate competition in an industry deemed to have become “too concentrated”.
Metro Bank – the first new high street bank in over 100 years – was the most visible of the upstart banks. A riot of red and blue, it had appeared boldly on the high street, offering customers working hours of 8am to 8pm, seven-days-a-week opening and perks to boot: safety deposit boxes for paperwork and jewellery, customer lavatories and water bowls for pets.
But as in so many other areas of modern life, the bricks and mortar experience gave way to a digital one. The New Bank would be an Online Bank, no bored teller required.
Starling Bank was founded in Anne Boden in 2014, the same year Atom Bank was born. In 2015 came Monzo and Revolut. Their mission was clear: to offer digital-only banking with the promise of greater control over finances, convenience, new products, ethics – and a bit of fun thrown in for good measure.
“I had come to the conclusion that banks were broken,” says Anne Boden, who launched Starling Bank after a career in traditional banking. “[They] were no longer appropriate for what people really wanted. There were lots of industries that had really dramatically changed and been disrupted. People were buying their music differently, they were texting and WhatsApping, they weren’t talking on the phone.”
Big banking, she points out, hadn’t changed “for hundreds of years”. Then, when they did move with the times, they moved, well, lazily.
“The branch model had moved to contact centres, the contact centre had moved to the internet, and the internet had moved to the app. Things were pretty stale and things hadn’t really changed. So I decided to quit my job in the old industry to start a new bank with a very, very different engagement model with customers.”
Nik Storonsky, co-founder of Revolut, was inspired by a similar dissatisfaction with the banking culture. “Following the collapse of Lehman Brothers in 2008, I ended up working at Credit Suisse, where I met Vlad Yatsenko, Revolut’s co-founder and CTO. We were both frustrated by the fees charged to send money abroad, and were disillusioned with the finance industry.
“We had seen first-hand the fees that were added to transfers, and discovered that there wasn’t anything on the market that provided a card and the ability to hold, send and spend multiple currencies without being stung by fees… We launched Revolut as a way to rebuild the finance industry from the ground up using technology, while saving people money.”
The new kids on the block promised to value each and every one of their customers – and their money, too. Ethical values were proclaimed, as were community values, fair wages for staff and transparency. This openness, ease of use and those pop-coloured debit cards, drew younger customers in their droves to these disruptor financial organisations.
Of course, it’s not solely right-on values that attract Generation Z‑ers and Millennials to these new style banks, but what they actually offer. Ease of use is, frankly, priceless. Especially if you can flash your cash quite literally with a zingy Monzo neon coral card.
Then there’s German mobile-bank N26, which offers options in stainless steel for their premium account holders, in swish colours like rose quartz and slate grey. Revolut also offers such metal delight. In fact, acknowledges Storonsky, their cards are one of the main draws for the 18 to 38-year-olds who make up the majority of their customer base. “We’ve created a range of cards in a variety of colours and materials to suit everyone’s tastes,” he says of a policy that adroitly harnesses the customer’s never ending appetite for the shiny, new and bespoke. “We have made handling your finances a more enjoyable experience.”
Yet for all their bells and whistles and funky colourways, are these banks actually offering anything fundamentally different?
“No,” says Alice Tapper, founder and author of Go Fund Yourself. “The fundamentals of banking are as they always have been. Yet challenger banks are undeniably giving the industry a much-needed refresh.
“For decades, limited competition and, in turn, little differentiation between the high street banks has kept the incentives for switching low. The package of better customer service, clean interfaces, being able to use your card abroad for free, spending insights and instant notifications is an irresistible one – particularly for younger consumers who are yet to develop bank loyalty.
“But I think there is also something less tangible which makes challenger banks appealing.” Paradoxically, she suggests, “they seem more human and empathetic, standing in stark contrast to the imposing high street ‘institution’.”
Not unexpectedly, however, those fusty old banks are now seeking to challenge the challengers. RBS are launching their own digital-only bank Bó, while NatWest brought Mettle to the market last year – a digital bank for small and medium businesses. Lloyds Bank are currently building a Cash Management & Payments platform because “our clients’ needs are changing”. HSBC has partnered with fintech start-ups Pariti (with whom they have created a SmartSave app) and Tradeshift (to make a platform enabling businesses to better manage their accounts and digital financial dealings with suppliers). And then there’s Barclays, who have created an entire “global community” for fintech innovation. Titled Rise, it aims to “disrupt, challenge and confront the way things are done in our industry.”
And that industry shake-up is far from over.
“The impact of the challenger bank is on the rise, presenting a threat to the growth of traditional banks,” says Tapper. “That’s reflected in a five per cent drop in new account openings among the Big Banks in 2019 compared to 2018.”
But as she points out, Big Banking retains one significant advantage: trust. Whilst one in ten new accounts opened are with a digital-only bank, only 24 per cent of those accounts are being used as a main current account.
There is also the not-insignificant matter of turning a profit. They won’t shout about it, but most challenger banks have struggled to do so thus far. While Revolut recently reported a 354 per cent revenue increase between 2017 and 2018, since the cost of sales increased 247 per cent within that year too, the bank actually recorded a loss of £32.8million after tax. Similarly Monzo, which raised £113 million in funding earlier this year – earning itself a valuation of £2 billion – has also yet to turn a profit, with losses rising 54 per cent between 2017 and 2018, to £47.2 million. It’s the same story with Starling Bank – a loss, before tax, of £26.9 million in 2018 – and with a number of others as well.
It seems the Big Four need not be quaking in their vaults just yet. As Tapper says, “Remember that the ‘challengers’ face their own challenge. Building legions of diehard fans is one thing – but finding a clear route to profitability is another.”
Nonetheless, with zingy bank cards enabling users to literally flash their cash and categorisation features allowing customers to seamlessly see when their eating out/entertainment/shopping expenditure gets to “hide-face” emoji levels, it seems the Challenger Bank’s appeal, for the time being at least, will remain. After all, a bank that can offer that – and more – through an app that is free to download and, in some cases, services that are free to use too? Well, that’s priceless isn’t it, in more ways than one.