Top UK Challenger Banks | 2023
15 June 2023
The UK is home to a powerful triumvirate of challenger banks, made up of Monzo, Revolut, and Starling Bank. Competition has always been fierce between these companies, with lofty investments being secured, international expansions, ever-increasing customer counts, and even personal feuds hitting headlines (more on that later). But whilst the big dogs fight it out, new entrants have been making their way onto the digital banking scene, offering targeted services to increasingly niche markets.
Read on for a rundown of the UK’s high-growth digital banking sector.
What is a challenger bank?
After the 2008 financial crisis, regulatory changes in the UK meant it was easier for new banks to receive licences. After a period of domination of the ‘Big Four’—Barclays, HSBC, Lloyds Banking Group and NatWest—it was decided that more competition in the sector would help prevent another crash. This created an opportunity for challenger banks, sometimes known as neo-banks, to enter the market that operate in a different way to traditional, high-street banks—online-first, personalised user experiences through mobile apps, real-time payment notifications and competitive pricing.
Our definition of a challenger bank excludes companies offering limited bank-like services, such as P2P loans, currency exchange or pre-paid cards. We’re talking about deposit-accepting institutions that have (or are intending to apply for) a banking licence. We also don’t consider subsidiaries of established parent banks as challengers.
How do challenger banks differ from traditional banks?
When Metro Bank launched in 2010, they were the first new bank in the UK in over 100 years, alongside TSB, Santander and Virgin Money. These were in the same vein as traditional retail banks, but since then we’ve seen new ways for customers to use their bank accounts through digital-first banks like Monzo, Revolut and Starling Bank.
Challenger banks offer many of the same services as traditional high-street banks, including current accounts, savings accounts, credit and debit cards, mortgages and loans. However, they usually don’t have physical branches, instead focusing on online-first, online banking services through apps. Most challenger banks are ones such as these and have been founded over the last 10 or so years.
Are challenger banks safe?
The UK is generally a trusting nation of online banking. 74% of people polled by YouGov in the UK agree that it’s safe to manage their money online, more than France, Spain, Australia, Italy, Germany and Hong Kong. However, back in 2020, while 68% of Brits said they trust their current bank, only 17% said they found challenger banks as reliable and trustworthy as traditional institutions. Of the UK’s approximately 20 million challenger-bank customers, only one in five customers consider their primary account to be a challenger bank. It’s clear that UK consumers still lack trust in the newer institutions. But should they?
Some companies market themselves as challenger banks, but are actually e-money or payment institutions like Monese and Pockit. Companies with an e-money licence are still regulated by the Financial Conduct Authority (FCA) in the UK, who work to protect consumers and their money, promote competition in the sector and the interest of consumers.
For challenger banks with banking licences, deposits are protected by the FSCS (Financial Services Compensation Scheme), up to a value of £85k. In the UK, banking licences are authorised by the Prudential Regulation Authority (PRA), with consent from the FCA, and certify that a bank has met strict legal criteria required to ensure their customers’ funds and data are kept secure.
However, in 2022, the FCA announced that they found some challenger banks need to improve how they assess financial risk, with some failing to adequately check their customers’ income and occupation, stating “there cannot be a trade-off between quick and easy account opening and robust financial crime controls”. The FCA has since launched a new strategy to improve these issues.
What does the UK’s challenger bank sector look like in 2023?
It’s safe to say that fintech innovation has succeeded in disrupting the financial services space. Since our records began, back in 2011, the UK’s fintech sector has seen meteoric growth. Fintech saw more deals in 2020, 2021 and 2022 than any other sector, making up 11.2% of all deals and four of the five biggest deals of the year.
Looking at the UK’s current unicorn companies, fintech is the most common sector for unicorns, with 21 currently operating in the space. These include challenger banks such as The Bank of London, OakNorth Bank, Revolut, Starling Bank, and Monzo. According to Plaid, in 2022, 84% of UK consumers use fintech to manage their money, with broad use across different demographics.
Challenger banks are thought of as a more convenient method of banking, and banking apps that save time and money are seen as driving factors for fintech adoption. This has prompted a mass migration towards challengers in recent years, which has put additional pressure on traditional banks to improve their mobile banking services and digital offering. RBS’s (short-lived) attempt at creating its own app-only bank Bó is a prime example of this. In September 2021, JPMorgan launched its own digital bank Chase in an attempt to stay competitive and respond to shifting customer demands. Chase offers challenger bank-style perks like 1% cashback on all spending and competitive interest rates, and has attracted over a million customers since its launch. It expects to launch a credit card by the end of the year, alongside integrating its investment business Nutmeg.
Investors are putting significant amounts of money behind challenger banks, seeing long-term potential in the sector. Since 2011, high-growth UK challenger banks have secured 236 equity deals, amounting to £11b in total investment—a rather impressive feat given how nascent an industry it is. Funding figures have massively increased in recent years too. There were just seven announced deals worth £47.7m in 2014, but a record breaking 2021 saw 51 deals announced, worth a huge £4.15b. The the following year, another £1.50b was invested in 30 announced deals. So far in 2023, there have been 11 deals worth £160m, with the top investment going to Zopa back in February at a value of £75.0m. Other top investments this year went to clearing; agency and transaction bank The Bank of London which received £33.0m, wealth management bank Monument which received £18.9m, and sustainable bank Tandem which received £8.37m.
What is happening in the challenger bank industry at the moment?
In March 2023, Silicon Valley Bank (SVB) collapsed, with Larry Fink of BlackRock expecting more banks to follow. SVB provided financing for around half of all US venture-backed healthcare and technology companies, and the collapse of Signature Bank and First Republic Bank soon followed. Comparisons and parallels have been drawn to the 2008 financial crash, which led to a fall in trust in traditional banks and allowed challenger banks to stake their claim.
However, many challenger banks are backed by companies with links to these collapsed banks. Chrysalis Investments, which has Starling Bank in its portfolio, saw its shares drop 2.5% when SBV collapsed. A month later in April, asset manager Schroder stated that they believed the value of their stake in Revolut had dropped by nearly half, valuing it at £5.4m, down from £10.1m.
The tech sector has seen mass layoffs throughout 2023, and now a key backer of tech companies in SVB has collapsed, which may impact funding for startups and challenger banks looking to break through into the market.
Who are the main challenger banks in the UK?
Of the equity investment secured by UK challenger banks in 2021, 64% went to the UK’s three main challenger banks – Monzo, Starling Bank and Revolut – across just six funding rounds. These three challenger banks are among the UK’s top five fintech companies, but how did these industry leaders first come to be?
Revolut was the first of the top challenger banks to launch, hitting the market in the UK in 2015. Founded by Nikolay Storonksy (CEO) and Vlad Yatsenko (CTO), Revolut launched with a free currency exchange and ATM withdrawals, making it easy for people to spend and transfer money abroad. Prior to working on Revolut, Storonksy—the UK’s first fintech billionaire—had a background as a trader at Credit Suisse and Lehman Brothers, whilst Yatsenko built financial software systems for major investment banks like Deutsche Bank.
Revolut expanded into Japan and the US in 2020, and has since expanded globally. Features include currency exchange, debit cards, virtual cards, Apple Pay, stock trading and buying and selling cryptocurrency. By the end of 2020, Revolut was breaking even and received a £4.2b evaluation, making it the UK’s most valuable fintech company at the time. According to Revolut’s website, it has over 30m users and offers access to 29 currencies. In January 2021, the company applied for a UK banking licence, which has not been approved. Revolut is currently an e-money institution, meaning users do not have the £85k protection of funds from the FSCS.
Revolut has gone on to secure £1.27b in equity fundraisings across ten rounds. Its latest round of investment, in July 2021, will be used to fund further product development and expand its marketing efforts, particularly in the US, India and Latin America. In late 2021, it also acquired talent sourcing marketplace Wanted and point-of-sale provider Nobly.
Monzo launched shortly after Revolut in 2016 under the name ‘Mondo’. Its founders met whilst working at rival company Starling Bank, leaving the company in 2015 to start their own venture. Monzo originally operated through a prepaid debit Mastercard and mobile app, before getting its UK banking licence in 2017. This allowed Monzo to offer full current accounts. Since then, the company has added features such as Monzo Flex, which allows you to spread the cost of payments over three, six or 12 months, loans, overdrafts, and fee-free spending abroad. In 2020, the company announced a premium service, Monzo Plus, for a small monthly fee, offering personalised spending categories, credit score tracking, discounts and travel insurance.
Monzo has raised £927m across 14 fundraising rounds, the latest in January 2022 at £91.4m with major investment from Chinese tech company Tencent. The funding brought Monzo’s valuation to £3.62b. Later in the year, in October 2022, Monzo received a grant as part of Identity Protect, a digital platform developed to help tackle losses from identity-fraud in the UK.
Starling Bank is the most recent of the big three challenger banks in the UK, launching in 2017. Founder and CEO Anne Boden first had the idea for it back in 2014, but due to disagreements with her founding team (Blomfield in particular), Starling was late out of the gate. Adding to this delay was that, unlike rival Monzo, Starling waited to receive its banking licence from regulators before launching.
Following a 30-year career in the banking sector, Boden sought to revolutionise the space, building an app to help customers manage their finances in real-time. She was awarded an MBE for her services to financial technology in 2018. Boden’s book, Banking on It, details the company’s founding, including her fallout with Blomfield and their conflicting visions for the company.
Alongside business accounts, Starling currently offers four current account options—personal, joint, euro, and teen—plus a debit card for kids, ‘Starling Kite’. It also offers budget planning tools to support customers through the cost of living crisis, and is working to reduce carbon emissions by a third by 2030.
Starling has raised £715m to date across nine fundraising rounds. The latest round was in April 2022, when it raised £131m for a 5% stake. The funding came from existing backers Goldman Sachs, Fidelity, Qatar Investment Authority, RPMI Railpen and angel investors, and brought the company’s valuation up to £2.53b. Starling ranks just behind Monzo on service quality, sitting in second place of all current account providers in the UK, with over 3m customer accounts opened to date.
New digital banks in the UK
Of course, there were other challenger bank startups surfacing around the same time as the top three, albeit operating on a smaller scale. Some challengers have tried to set themselves apart through their focus on ‘green finance’, for instance, such as Tandem (first founded in 2013) which now offers eco-friendly lending initiatives, alongside its instant bank transfers. Meanwhile, others have taken the B2B route and hence a lower profile, despite being some of the top challenger banks for businesses—OakNorth and Atom Bank are among the most notable (both also founded in 2013).
Despite massive amounts of investment in recent years, and rising user numbers, many of the early challenger banks have come under scrutiny for failing to turn a profit. Commentators often argue that these major fintechs aren’t worth their sky-rocketing valuations. Monzo had a particularly hard time of it during the pandemic, with annual post-tax losses growing to £113.8m in 2020 (up from £47.2m the year prior) which it put down to the impact of COVID-19. The bank also saw a 40% drop in its valuation. However, record revenue growth in 2022, increasing 250% to £440m, means Monzo now expects to break even in 2023.
Not everyone has suffered, however. Starling announced in April 2022 that it had not only survived the pandemic, but had been in profit for the 18 months prior, which it put down to its push into the mortgage market. And when comparing the three big players, Revolut earns the most revenue per customer, whilst Starling has the most diversified revenue stream and holds the most deposits per user.
In the midst of criticisms and escalating tensions within the sector, a new wave of challenger banks has arrived. Unlike their predecessors, these digital banks are taking a more focused approach, targeting smaller subsets of customers or offering more streamlined financial products, cross-selling features from the very start to maximise profits. One example is Allica Bank which focuses primarily on business banking for established SMEs. Launched in 2019, it operates through an online banking platform and a network of local bankers, offering savings accounts, commercial mortgages, and asset finance. Allica Bank has so far raised £350m in equity investment, across 11 rounds, most recently in 2022 receiving £125m from investors Atalaya Capital Management, Warwick Capital Partners and Technology Crossover Ventures (TCV).
Another recent arrival is ClearBank, the UK’s first purpose-built clearing bank in more than 250 years, which launched in early 2017. Clearing banks are authorised to move money between organisations and individuals, and before now, this market had been dominated by just a handful of firms. Focused on automating and speeding up payment processing for businesses, ClearBank offers API integrations and real-time access to payment schemes like Bacs. To date, the company has secured £348m in equity fundraisings.
Also in the works is Fiinu, which is aiming to transform the UK’s short-term borrowing landscape and help customers improve their credit scores. Meanwhile, new kid on the block Kroo launched its current account in 2022. The ‘social bank’ plants two trees for each new customer that opens a current account, with the aim of planting 1m trees by 2024.
So challenger banks are making waves, big players and new entrants alike. From greater transparency and ease of use, to handy budgeting tools and ‘polymorphic’ debit cards, these innovative fintech startups are transforming modern-day banking. But should traditional banks be worried? Will the most recent wave of digital challengers surpass the likes of Revolut? However this turns out, challenger banks are sure to have a lasting impact on our relationship with money.
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