The rise of challenger banking

There are very few businesses which don’t function either largely or entirely online. Going digital is now more of a given than a forward thinking business strategy. For this very reason, challenger banks have emerged as the digital solution to an online gap in the banking market. This new style of banking asks customers to shift their banking patterns from mostly offline to predominantly online. Customers who are accustomed to the brick and mortar (BAM) people-based service may be the least likely to explore this, but for those of a digital mind-set this is an exciting development for a quicker, more efficient way of banking. So, what does the development involve?

Firstly, starting from scratch allows challenger banks to invest fully in building cutting-edge systems and therefore ensure their technologies are ahead of everything pre-existing in the market. The absence of aged systems and processes which have adapted with time enables designers to develop online banking methods which are tailored specifically for modern customer-needs. Digital banking looks to appeal to customers who are attracted to a simpler, faster way of handling their finances. The demographic of people who prefer to bank in this way is ever-growing in line with the digitalisation of most businesses and every-day processes. As such, this is reflected in the impressive ROI’s of challenger banks which indicates those such as ‘Aldermore, Metro, OneSavings and Shawbrook, delivered a 17 per cent return on equity last year, up from 15.8 per cent in 2014’ according to KPMG.

Of course, there will always be a demographic of people who prefer visiting their local high-street bank and seeking advice person-to-person. Banking is almost emotive. I am one of many who opened their first account at 16, and still use the same branch. It’s definitely a generation thing, but I now want to do more online, it’s simply easier and quicker and just makes sense. For “us” the ‘phygital’ balance, a physical bank we can visit alongside a digital supporting system, offers a better compromise. In this respect, digital banks are diversifying the market and encouraging overall development. Traditional banks must remain to target an offline customer base but the rise of challenger banks means traditional banks are encouraged to develop their back data systems to compete. Together, these competing banks combine to form an industry developing at an enormous rate to meet the demands of extensive customer needs and this looks set to continue as twenty new challenger banks have already lodged applications with the Bank of England.

So what will the future look like for digital banks? At present, challenger banks target very niche areas such as buy-to-let or specialist commercial lending. Warren Mead, Head of Challenger Banking at KPMG suggests challenger banks, “will need to start widening their nets and working harder to compete with single-service fintech firms, such as payment companies or lending platforms”. Should they continue to adapt and diversify their target areas they show promise for remaining as a viable banking option. Challenger banks have a digital-heavy offering for an ever-technological world. It is unlikely this will ever replace our historical BAM banks but perhaps we will continue to see more rounded options by way of online and offline banking to suit a more diverse customer.

- Alistair Collier

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