Digital banking challengers throw down the gauntlet

Online banks are thriving in the savings market, but attracting current accounts will be harder. Picture: Andersen Ross
Online banks are thriving in the savings market, but attracting current accounts will be harder. Picture: Andersen Ross
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The new wave of challenger banks will soon be a “thorn in the side” of the high street status quo as people become increasingly comfortable using technology to run their finances.

That’s the expert view after the arrival of digital-only Atom Bank signalled the beginning of a technology driven challenge to the established order that will see several other launches over the coming year.

Efforts to boost switching levels among bank customers have fallen short of expectations, despite continuing disillusionment with the UK’s high street brands. But experts believe the emergence of a genuine alternative to the traditional banking model may finally offer renewed competition that benefits consumers.

Several challenger banks are already listed on the stock market, including Aldermore, OneSavings and Shawbrook, while the Financial Conduct Authority (FCA) has awarded licences to 15 new banks over the past three years.

Those given the green light by the regulator include Tandem, Oaknorth, Starling and Atom, with up to a dozen more applying for licences this year.

Atom Bank, backed by Metro Bank founder Anthony Thompson, is a branch-free, digital-only proposition that finally arrived early this month. The bank – which counts leading fund manager Neil Woodford among its investors – is accessible only through a mobile app available on iPads and iPhones and has launched with one-year and two-year savings accounts paying 2 per cent and 2.2 per cent respectively.

Further products are in the pipeline, including loans, mortgages and possibly a current account, and access will soon be widened to other mobile platforms.

With Starling among the other digital-only newcomers likely to arrive this year – targeting the current account market and aiming at younger customers – the options are widening rapidly.

“As more people turn to technology to manage their money rather than the dwindling network of bank branches, the likes of Atom will become an additional thorn in the side of traditional banking models,” said Andrew Hagger, personal finance expert at

“These new players have agile state-of-the-art technology which enables them to change and adapt far quicker and easier than mainstream banks with their clunky, unreliable IT infrastructure.”

Alexa Nightingale, head of financial services at research firm Opinium, agreed.

“Unfettered by costly branch networks and legacy IT issues these newcomers can pick their product areas and also choose how competitive to make their offerings,” she said.

“While the current account market will be harder for them to crack and for some customers the lack of branches will be a barrier, our data show that there is a growing appetite from consumers to see the status quo challenged.”

Awareness of challenger banks remains low, a recent Opinium report found. But 90 per cent of those surveyed said they would consider taking out a financial product with a challenger bank.

They were most likely to do so if it offered competitive interest rates, cash incentives and lower charges, according to the research, with good customer service also prominent.

Challenger banks are already prominent in the savings market. Those sticking with the high street brands are missing out on the savings rate offered by the likes of Shawbrook Bank, Charter Savings Bank and Renault-backed RCI, all among the newcomers dominating the savings market best buy tables.

“For an online bank offering market leading deals the prevalence of best buy tables and price comparison websites means consumer exposure is now much easier to harness and the opportunities for winning customers even greater,” said Nightingale.

But with interest rates likely to remain low for the foreseeable future there’s a limit to the customers that can be won through savings products, said Hagger. “There’s no doubt that new players are winning new business by offering more competitive deals, but it’s a case of small steps as there’s no evidence that high street banks are haemorrhaging customers at the rate some had anticipated.”

So how do the newcomers convince people that they really do offer something better? One way is to simply to behave differently, says Michael Fotis, founder of financial services reviewing website Smart Money People ( He offers two examples: “Atom Bank allows users to download their app and play with a dummy account. And although roughly six months away from launch, Tandem Bank has invited the public to join them as ‘co-founders’, and pledged about 5 per cent of its share capital to the scheme, in an attempt to build a community of advocates and an eager customer base.”

Challenger banks are also better placed to target attractive areas of the market overlooked by the existing providers, he said.

“For example, CivilisedBank is focused on business current accounts, and should find it easier to tap into the well of frustration that exists with certain banking products.” Business banking is consistently the worst rated product on his site.

“The moment of truth for challenger banks will be whether they can prove to be better enough to earn the ultimate prize… our current accounts.”

£53bn bill for persistent misconduct

The UK’s biggest banks have paid out almost £53 billion in fines and redress over the past 15 years, according to a new report highlighting the costs to customers and shareholders of banking misconduct.

More than £37bn of that was due to the payment protection insurance (PPI) mis-selling scandal, while mis-selling of interest-rate hedging products, endowments and investment products also contributed heavily to the total. The costs have made it difficult for banks to rebuild their capital, lend to customers and pay dividends to shareholders, said the New City Agenda report. Yet the same banks continue to pay billions of pounds in bonuses, said Lord John McFall, director of the think-tank and former chair of the Treasury Select Committee.

“The profitability of UK retail banks has been imperilled by persistent misconduct and an aggressive sales-based culture,” he said. “This has made every citizen poorer through our pension funds and our ownership of the bailed out banks.