Challenger banks flexed their muscles in 2018

By Roger Baird on 7th January 2019

Challenger Banks

Digital-only banks came up with many of the brightest ideas in the sector in a bid to draw customers from high street rivals.

Challenger banks flexed their muscles in 2018

Last year challenger banks lived up to their name and grew strongly as they added new services and expanded into new territories. By contrast high street rivals in the 10th anniversary of the financial crisis continued to see their reputations trashed by a range of scandals such as huge overdraft charges, IT outages and persistent payment protection insurance payouts.

Below is a snapshot of the relentless efforts by banking challengers to attract business, in an industry where customers remain notoriously inclined to sit on their hands rather than change banks.

Fundraising  

A number of the biggest challenger banks were able to pull in sizeable amounts of investor cash to fund growth.

In December, leading app only bank Monzo opened its crowdfund to eligible account holders and raised its targeted £20m in just three hours.

The cash call was hosted by crowdfunding site Crowdcube. Luke Lang, co-founder of Crowdcube, said the bank’s successful raising “will undoubtedly spark a new era for crowdfunding as bigger brands with large communities want to emulate Monzo and benefit from the backing of their customers.”   

And earlier, in October, Monzo, hit unicorn status after it was valued at £1bn by institutional backers, following an £85m cash call to double its workforce to between 800 and 900 staff to cater for its 1.1m customers.

UK digital bank OakNorth became a double unicorn in September, topping a $2bn valuation after securing a further $100m from venture capital firms. The lender, aimed at entrepreneurs, has doubled in size in just 12 months.

Among other notable funding rounds UK digital bank Tandem raised £15m in November after striking a deal with Hong Kong financial services business Convoy to launch a ‘virtual bank’ in the region. Tandem will provide the technology, while Convoy plans to take advantage of its distribution network and local expertise.

New territories

Leading digital banking challenger (and now fully fledged challenger bank, arguably) Revolut was granted a European banking licence in December, after little more than a year of applying.

The licence will give the firm the power to roll out banking operations across the European Union, including full current accounts, loans and a commission-free stock trading tool.

The rapidly expanding firm is also in the middle of an ambitious international expansion, with launches in the US, Canada, Singapore, Japan, Australia and New Zealand all expected early 2019.

A bullish Nik Storonsky, founder and chief executive of Revolut, said the company was living up to its “reputation as the 'Amazon of banking'. Our vision is simple: one app with tens of millions of users, where you can manage every aspect of your financial life with the best value and technology.”

Berlin-based smartphone bank N26 launched in the UK in October, and followed that up with openings in Denmark, Norway, Poland and Sweden a month later. By the end of the year it traded in 17 countries across the eurozone.

The business, which gained a banking licence from German financial regulator Bafin last year, offers online accounts for cash withdrawals, savings and insurance services.

Its backers include the founder of conglomerate CK Hutchison Holdings Li Ka-shing, one of Asia’s richest men, and Peter Thiel, a co-founder of PayPal and an early investor in Facebook.

In October, UK digital player Monese launched its first business accounts, and opened its second international office in Lisbon to go alongside premises in London and Tallinn.

New services

Amid a barrage of new credit cards and services these players launched to attract customers, a number operations caught the eye.

Fintech app Starling Bank gained a high street presence by striking a deal with the Post Office, allowing its customers to withdraw and deposit cash at any one of its 11,500 branches nationwide. The Post Office boasts more branches across the country than all of the UK’s banks and building societies combined.

Spanish high street player Santander said in May it intended to establish a digital bank under a separate brand as it bids to compete with growing mobile rivals. This follows a March announcement from Edinburgh-based RBS who said it would launch its own digital brand, understood to be called Bo, set to trade later this year.

Also, in March Amazon sent a shiver through this industry, as it has in retailing and television. Reports emerged that the US online giant has held talks with investment bank JPMorgan Chase to develop a personal account product.

This would not be Amazon’s first foray into the financial services sector. It has become a major player in online lending to small businesses, announcing last in summer 2016 that it had originated $3bn in loans since launching the service in 2011. By contrast, leading marketplace lender Funding Circle only recently passed the $5bn mark globally.

Last year digital banking barely stopped for breath, there are no signs brakes are likely to be applied  in 2019.

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