Challenger and neo banks are acquiring significant market share in
the banking world. The Compound Annual Growth Rate (CAGR) of these
banking sectors currently stands at 46.5% and it’s only
increasing. With that said, what sets challenger banks apart from
the traditional banks that are suddenly feeling the heat?
John Cragg, CEO of MYHSM,
Challenger banks vs. traditional banks
Firstly, the biggest difference between neo and challenger banks
and their incumbent competitors is their physical presence. Neo and
challenger banks tend to be entirely digital, cloud-based
enterprises that utilise web platforms and mobile applications as
their main points of customer contact.
In direct opposition to this, traditional banks are burdened
with legacy technology and infrastructure and still take up
significant space on the high street. This was an advantage, but
the coronavirus crisis has shown these kinds of physical structures
are more prohibitive these days than beneficial.
For example, as the pandemic caused lockdowns across the world,
challenger banks were relatively unaffected. Their customers were
used to managing their finances with an entirely digital-first
experience. As a result, challengers can be defined by their
flexibility, scalability, and that their customers have a method of
banking that better fits their lifestyle.
How challenger banks have grown
The challenger banks currently leading the way include the likes
of NuBank, a Latin American start-up that acquired 15 million
customers in 2019,
Chime, a US neobank which quadrupled it’s
valuation in less than a year to $5.8 billion from $1 billion in
March 2019 and Revolut, one of the first
challenger banks to launch and arguably one of the most well-known
challenger brands in Europe which is now valued at $5.5
However, in the last decade there has been an enormous influx
into the market, with other challengers rising in the ranks,
including Monzo, Starling, N26, Monese and
SoFi to name but a few.
With their flexibility, accessibility and digital nature having
ensured they are here to stay, challenger banks have gradually won
over customers from traditional banks through a wide range of
value-added services and add-ons in addition to un-rivalled
Furthermore, challengers don’t just provide a current account
for users, but they also offer features that help customers with
money management, often targeting specific needs of customers that
are self-employed, or travel extensively. As well, they tend to
target the financial challenges facing SMEs, utilising open
banking, banking as a service and PSD2 to provide solutions that
far outstretch their traditional banking counterparts.
The impact of COVID-19
Despite their digital-first approach, challenger banks have
witnessed declining app downloads this year. Conversely,
traditional banks like
TSB have seen the opposite and have gained greater interaction
with their online banking platforms, not necessarily because
customers want to interact digitally but rather they need to during
the pandemic. With the convenience of online banking being
experienced first hand, this trend is set to continue.
Moreover, there is still a perceived level of safety associated
with incumbents which challenger banks have yet to conquer.
Customers of challenger banks tend not to deposit large sums of
money into their accounts but rather use their card abroad, due to
the competitive exchange rates, and for smaller purchases with
their ‘spare change’. The global lockdown has abruptly stalled
travel plans and small purchases such as eating out, subsequently
pausing the growth momentum for challengers.
Are challenger banks acquiring significant market share
away from incumbents?
There are currently an estimated 100 challenger banks in
operation globally, and traditional banks are feeling the pressure.
There is a rising need for traditional banks to develop strategies
to minimise the erosion of their place in the market they once
dominated. However, legacy banks are relying on there being
obstacles to inhibit challenger banks from becoming the primary
bank account and financial provider of choice.
For example, certain customers who always used legacy banks will
be harder to persuade to switch. Legacy banks already have their
roots firmly planted, so challengers don’t just need to convince
customers to switch, but they need to implement a differentiated
growth strategy while simultaneously not overstretching themselves.
Not only this, but they also need to consider how to become
financially viable on the trajectory from start-up to scale up and
The future for challenger banks
Both challengers and neo banks have set certain expectations and
standards which are here to stay and will continue to be expected
within the banking industry. Not only this, but they could become a
formidable presence in the banking space, if they can gain the
required confidence, trust and market share which expands beyond
millennials and early adopters. If achieved. they have the
potential to overshadow the legacy banks that have remained
unchallenged for decades.
MYHSM: Are Challenger Banks Surpassing Traditional Banks?
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