UK Challenger Banks: Who’s Winning the Race?

| Lucy Wilson

Category: Tech & innovation

Challenger banks, or neobanks, exist to disrupt incumbent firmshigh street banks such as HSBC, Lloyds, and Barclaysand provide personal and efficient banking experiences. Our definition of a challenger bank excludes companies offering limited bank-like services, such as P2P lenders, that don’t have (or aren’t intending to apply for) a banking licence

The UK is home to a powerful triumvirate of B2C challengers, made up of Monzo, Revolut, and Starling Bank. Competition has been hotting up between these big banks, with frequent announcements of lofty investments, 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. 

Challenger banks: lay of the land

Since our records began in 2011, the UK’s fintech sector has seen meteoric growth, with £2.4b of funding announced last year, through 210 rounds. According to EY research, by 2019, fintech adoption among digitally active consumers had reached 71% in the UK—a five-fold increase from 2015. It’s safe to say that fintech innovation has succeeded in disrupting the financial services space. 

In January this year, Revolut had more than eight million customers world-wide, whilst Monzo reported it was gaining 55k new users each week. This mass migration towards challengers has been putting pressure on traditional banks to improve their mobile banking services and digital offering. RBS’s (short-lived) attempt at launching its own app-only bank Bó is a prime example of this. 

But whilst there’s mounting interest in neobanks, it seems they may not have gained people’s trust just yet. Recent reports suggest that traditional banks are still used for four out of five purchases. And at the start of lockdown, use of challenger banks fell by around 90%, compared to just 60% for traditional ones. 

Despite concerns, however, COVID-19 seems to have accelerated the shift towards digital services for many customers, and investors are still putting significant amounts of money behind challenger banks, seeing long-term potential in the sector.

Key trends in the startup banking industry

There are 42 active, challenger banks in the UK that have met one or more of our growth triggers. Of these, more than two-thirds (29) are based in London. Together, since 2011, these new banks have secured 95 announced equity fundraisings, at an average value of £31.6m, and worth £2.87b in total.

Investment into challenger banks has risen fairly steadily since 2014, besides a slight dip in the number of deals secured in 2019—this has since rebounded this year, despite ongoing uncertainty during the pandemic.

Graph of announced equity deals since 2014

Between Q1 2015 and Q1 2020, the quarterly value of announced funding rounds rose by more than £500m, from £4.3m to £521.5m. In addition, the number of fundraisings secured each quarter more than doubled, from three deals in Q1’15 to seven in Q1’20.

So far this year, there have been 24 announced fundraisings, involving 18 challenger banks. Between January and November, a total of £787m was raised, the vast majority (£521.5m) of which was secured in Q1. Top investors in 2020 include crowdfunding platforms Crowdcube and Seedrs, co-investment fund GrowthFunders (managed by GCV), and the Government’s COVID-support scheme Future Fund (managed by British Business Bank).

UK challenger banks: the industry leaders 

Of the equity deals announced this year, 77% of investment went to the three main challenger banks, through five funding rounds. Monzo and Starling Bank raised £60m and £100m, respectively, whilst Revolut secured a massive £445.4m. 2020 saw Revolut’s largest fundraising to date, as the company raised £383m in February to support its US expansion.

Revolut

Revolut was first on the scene of the early challenger banks, launching in the UK in 2015. Founded by Nikolay Storonksy (CEO) and Vlad Yatsenko (CTO), Revolut sought to transform the way people spend and transfer money abroad with its financial app. Prior to working on Revolut, Storonksythe 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.

In its five years since launching, Revolut has expanded globally, and now offers several additional features, including insurance, trading (including cryptocurrency), budgeting tools and bill splitting, plus junior accounts designed for children. It has also begun offering personal loans and credit cards. And in 2017, the company launched Revolut Business, with added features such as company cards, expenses, and custom software integrations for business customers.

So far, Revolut has secured £690m in announced fundraisings through nine rounds. And according to its website, it now has more than 12m personal customers and 500k business users around the world. In July 2020, the company received its most recent £62.4m equity fundraising, with American private equity firm TSG Consumer Partners—a new investor for them—at a pre-money valuation of nearly £4b.

Revolut app

Monzo

Quickly following was Monzo, first launched in early 2016 as ‘Mondo’. Monzo’s founding team met whilst working at rival venture Starling Bank, leaving the company in 2015 to start their own company, under Starling’s then-CTO Tom Blomfield. In May this year, Blomfield stepped down as Monzo’s UK CEO (although remains with the company as President), being replaced by its existing US chief executive TS Anil.

Initially operating through a prepaid Mastercard debit card and mobile banking app, Monzo didn’t receive its banking licence from regulators until 2017. These days, the Monzo app now offers both personal and business accounts, with integrated accounting and tax pots, plus multi-user access for small companies, and a strong focus on savings and borrowing (through both overdrafts and loans) for consumers. Earlier this year, it also announced a new premium service Monzo Plus, for a small monthly fee

Since its formation, Monzo has secured £384m in announced equity deals, through 12 funding rounds. Most recently, in June 2020, it received a £60m fundraising with several US-based investors, as well as UK firm Passion Capital. The company’s website currently boasts having more than 4.8m customers with a Monzo bank account.

Monzo app and colourful debit cards

Starling Bank

Whilst Starling Bank is the most recent of the three big challenger banks, having launched in the UK in mid-2017, the company’s 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 long 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 new book, Banking on It, details the company’s founding, including her fallout with Blomfield and their conflicting visions for the company.

Starling offers four account options on its mobile apppersonal, joint, euro, and businessplus a debit card for kids, ‘Starling Kite’. The bank has also introduced a number of new features during COVID-19, specifically built to support customers during the pandemic. These include government-backed lending for small businesses, mobile cheque deposits, and its new Connected card designed for people self-isolating and relying on friends and family to shop on their behalf.

To date, Starling Bank has raised £273m, through seven announced funding rounds, been crowned Best British Bank for the past three years, and has opened more than 1.8m customer accounts with over £3.6b in deposits. In May 2020, the bank secured its most recent fundraising with existing investors Merian Chrysalis Investment Company and Jersey-based JTC Group, totalling £40m.

Starling Bank app and debit card

Despite massive amounts of investment in recent years, and rising user numbers, 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 has had a particularly hard time of it during the pandemic, with losses growing to £113.8m (up from £47.2m the year prior) which it puts down to the impact of COVID-19. The bank’s latest fundraising also saw a 40% drop in its valuation.

Not everyone has suffered, however. Starling announced in November that it had not only survived 2020, but was thriving, and on course to becoming the first, profitable UK digital consumer bank by the end of the year. When comparing the three, Revolut earns the most revenue per customer whilst Starling has the most diversified revenue stream and holds the most deposits per customer.

There were of course other challenger banks surfacing around this time, albeit operating on a smaller scale. For example, Monese (launched in 2015) which first set itself apart as a bank built for travellers and expats needing to carry out ATM withdrawals and set up current accounts overseas, and has since partnered with ProxyAddress to enable those facing homelessness to do the same. 

Meanwhile, others have taken the B2B route, and hence have a lower profile than the big consumer banks, despite securing considerable amounts of investment themselvesOakNorth and Atom Bank being among the most notable. Others have tried to set themselves apart through their focus on ‘green finance’, such as Tandem (first founded in 2013) which now offers eco-friendly lending initiatives, alongside its instant bank transfers. 

New entrants to the neobanking scene 

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 (following Monese’s lead) 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, Allica 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 £122m in equity deals, through seven funding rounds, between March 2015 and September 2020.  

Another recent arrival is ClearBank, the UK’s first purpose-built clearing bank in more than 250 years. Clearing banks are authorised to move money between organisations and individuals; 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 integration and real-time access to payment schemes like Bacs. To date, the company has secured £163m in fundraisings, alongside a £60m grant.

Having launched across Europe and the US last year, Glint’s mobile app is also unique, allowing users to spend money from their phone, but using gold to back transactions. In doing this, Glint aims to protect users from market fluctuations, providing a more reliable form of money for saving and spending. To date, Glint has secured £21.5m in fundraisings, through six rounds, between August 2017 and November 2020. 

Meanwhile, just launched in October, new kid on the block HyperJar is a budgeting app offering users a network of mini-accounts (or jam jars) which can be tailored to their lifestyles, all connected to the same card. Additional features include kids cards, and pop-up joint accounts, allowing as many as 100 people to pay in, message, and spend from the same jar. HyperJar also partners with well-known brands and retailers, enabling users to prepay for their shopping in exchange for an annual interest rate of 4.8%. The digital bank has so far received three equity fundraisings, totalling £8.19m.

Also in the works are B-North and Lanistar: whilst these challenger banks were founded in 2019 and 2017 respectively, they are yet to launch their final products. Fintech companies often take longer than most to build a market-ready product, especially in the case of banks due to the additional time taken to secure regulatory approval for a banking license

B-North is a Manchester-based firm aiming to disrupt the UK’s SME lending industry, whilst Lanistar is aimed at millennials and Gen Z and allows users to link multiple payment cards into its app and debit card. Lanistar made the news following a warning from the Financial Conduct Authority (FCA), but this has since been withdrawn following changes made by the company.

Closing thoughts 

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 fintechs are transforming modern-day banking. 

But should traditional banks be worried? Are investors right to keep putting money behind what’s currently a less-than-profitable industry? And 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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