The rise of the challenger banks

Nearly two years ago, Chancellor George Osborne made a speech, which signalled the Government’s intention to stimulate competition.

Nearly two years ago, Chancellor George Osborne made a speech, which signalled the Government’s intention to stimulate competition in the retail banking sector by making it easier to start a small bank, and in turn create more choice for customers.

Two years on, much has been written about “challenger” banks but they are yet to break through, largely because it is still difficult to enter the banking fray. But first let’s define what a challenger bank is. I see a challenger as an organisation with a full banking license issued by the FSA that provides a range of financial services and, crucially, is a tier two bank, as opposed to being one of the big players. For “challenger” we don’t have to necessarily read “new” – many of the smaller financial services organisations have been in operation for many years, but with the introduction of new ways of technology based banking and not high street presence, these organisations are now finding new ways to attract those customers disillusioned with mainstream banks.

A new breed of challenger

Whereas some of the challengers have been around a while, or have divested from larger banks, there’s also a new breed of challenger emerging – tech savvy financial companies, which understand how to engage with customers in new and exciting ways. Take Fidor bank for example. It’s an online bank with no branches and has innovative ways of rewarding customers, such as paying them to create help videos for other customers (which the bank reviews and uploads if suitable) or by increasing their current account interest rate by 0.1% for every 2000 likes on Facebook.

Organisations like this are using original thinking to make a name for themselves. Without the constraints of legacy systems or processes, they are well placed to employ innovative and agile approaches to road test new strategies, keep those that work and drop those that aren’t. All of this is happening in an environment where social media is becoming increasingly powerful and word of mouth spreads like never before.

Will we see more newcomers?

Last year the FCA said that there were 29 organisations, which had applied for banking licences and whilst details of these companies haven’t been revealed, it is likely there will be some interesting changes to come. And most new entrants will probably be specialists as opposed to imitating the “bulge bracket” banks.

As customer choice increases, the traditional banks will have to fight back. The erosion of their customer base will be a steady drip feed to the challengers. Innovation will have to prevail and at the root of it all will be a bigger focus on better service to an increasingly knowledgable customer base. The next few years really could be the turning point for boosting competition in the banking space – will it be the time of the challenger?