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what is a challenger bank
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    Challenger banks have taken the banking sector by the scruff of the neck and dragged the industry into a new world of modern, versatile and vibrant financial offerings. But what is a challenger bank and what do they offer customers that set them apart from the traditional big high street banks?

    What is a challenger bank and where did they come from?

    Challenger banks emerged from the wreckage of the 2008 financial crisis. In the wake of international disruption to economies, the aim of allowing new entrants into the UK banking sector was to reduce the hold that the traditional ‘big five’ banks (HSBC, Lloyds, Barclays, NatWest and Santander) have had.

    The term ‘challenger bank’ was coined to describe the original intention to provide additional competition by issuing licences to operate.

    Although the most successful challenger banks to emerge have mainly focused on personal and business services, there are also new entrants that have specialised in lending and mortgages.

    What are the characteristics of challenger banks?

    Challenger banks have typically distinguished themselves as technology-driven with a predominantly digital presence.

    Offering fresh app-based portals and online banking tools, the challenger banks were quick to introduce a host of innovative banking, lending, budgeting and other financial tools.

    This disruption to the market quickly had the big banks playing catch up to update their own products and services.

    Meanwhile, there are a handful of challenger banks who have opened their own high street branches to directly compete with the long-established retail banking giants literally on their own doorsteps.

    Challenger banks, vertical banking and niche sectors

    The challenger bank sector has been notable for driving its own subcategories and creating entirely new niche markets. So-called ‘vertical banking’ sees providers delivering highly personalised service to meet the needs of tightly defined customer groups.

    For example, some challenger banks have focused on children and teenagers, the LGBTQ+ community, immigrants, small business owners and those who require services that adhere to Islamic principles.

    There is also a growing interest in more ethical, sustainable banking operators. Some challenger banks have demonstrated a wholehearted commitment to investing in ethical movements, renewables and social initiatives while offering customers the opportunity to reduce their carbon footprint.

    Challenger banks and business customers

    As well as personal banking customers gradually making the shift to challenger banks – market share of 8% in 2022 compared with 1% in 2018 according to the Financial Conduct Authority (FCA)- increasing numbers of businesses are making the switch too.

    For example, Starling has been a notable success story in encouraging SMEs to make the change and now has a market share of 7% among these small and medium-sized enterprises.

    Challenger banks have been at the forefront of streamlining processes through fintech and can often offer lower lending rates. This has also enabled challengers to address lending needs for small and medium-sized businesses that have historically not been well served by traditional banking models.

    Lending to micro-businesses has also been a growth strategy for a number of challenger banks.

    With the large banks still hesitant to take on the risk of providing loans to start-ups and small firms, challengers have been able to harness more agile and personalised systems to target micro-businesses. Automated decision making and integrating third-party firms to reach more intelligent lending conclusions have been just two of the drivers behind this.

    Overdrafts – so long a staple of personal and business banking – are even becoming outdated. Challenger banks are increasingly promoting ‘positive credit’ banking supported by digital currency enabling data sharing between partners that considers the ‘good’ attributes of a customer’s financial history and not just the negatives such as defaults and court judgements.

    Challenger banks are right at the forefront of linking business customers with accountancy solutions too. Many now offer free access to accounting software that can be integrated with their online banking platforms.

    By no means intended to replace the expertise of ‘actual’ accountants, the move is all about sharing data that benefits each partner.

    The aim is to enable firms that have typically struggled with some of the basics of accounting to access real-time, easy-to-understand financial information – cash flow, monitoring efficient payments and accessing cash and capital quickly.

    It’s all about making sound decisions based on useful information – the absolute cornerstone of business success. And that makes sense for all.


    To find out more about the pros and cons of switching to a challenger bank and how we can help your business navigate their integrated finance tools to support your accountancy needs, contact us.

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