A look at the rise of popular challenger, online-only bank accounts
In this Guide
Internet banking isn’t a new phenomenon. In fact, commercial online banking has been available since the late 90s. However, a new range of Internet-only banks have started to spring up. These online or app-only providers give customers a new degree of freedom and convenience when it comes to handling their money. But, if you don’t know what you’re doing, it can become frustrating and difficult to choose the best online-only bank account for you.
In this article, we give you all the information you need to find a suitable app-only bank. We cover what the benefits of the system are, what makes for a good online bank account, and how and whether you should switch to one. We also provide some examples of the best online-only banks you can find on the market today. Finally, we’ll explain some pros and cons of the accounts we mention, helping you choose the right one.
What Makes a Good Online Bank for You?
To those who aren’t tech-savvy, the thought of having a bank without physical branches may seem like a strange idea. Yet the concept of market ‘challengers’ isn’t a new one; services such as Uber, Spotify, and Airbnb have changed the way people think about these particular industries. Challenger banks are no exception.
By embracing technology and the prevalence of smartphones and the internet, online-only banks aim to make the whole banking process easier and more streamlined. Using an app or internet service to manage your banking saves you time in the long run, at least, in theory. And it means you can carry out your business whenever is convenient for you. Many app-based banks offer 24/7 chat support through their platform.
You can manage your finances, make payments, transfer money, and check your balance all through an easy-to-use app. Not only does it bring this convenience, but it also means that you can see your balance update in real time. As soon as you make a transaction, your app will update your account, provided you’re connected to Wi-Fi or mobile data.
There are plenty of other features that make online-only banking convenient. Advances in technology and security mean that the landscape for your finances is changing. Hopefully, these kinds of banks can help you manage your money more effectively, even if it’s not your main account.
How to Choose the Right Online Bank Account
It probably won’t come as a surprise to you, but there are plenty of online-only banks to choose from. Although this particular method of managing finances is quite new, many companies have seized the opportunity. The services on offer differ between them. For example, some specialise in savings and mortgages, while others offer current accounts. Your first decision should be around the kind of service you need.
Some providers are signed up to the Current Account Switch Service (CASS), which makes the process of transferring your money easier. We cover this in detail below, but you need to consider whether an app-only bank will replace your existing accounts or simply work alongside them.
Because this type of banking is so new, some companies aren’t yet fully licensed. This means that any money you deposit with them isn’t protected by the FSCS scheme. As a result, if the company goes bust, your money won’t be guaranteed. Usually, up to £85,000 is guaranteed by the FSCS. Depending on what you’ll be using your account for, and how much you’ll have in there, you may want to bear this in mind.
One final consideration should be interest rates. Some online-only banks offer interest on in-credit balances. Often, this can be competitive, as the banks don’t have to worry about bricks and mortar costs. However, some don’t offer interest at all, while others have a lower rate than high-street banks. Compare the rates on offer with your needs to see which works best.
Switching to an Online Bank Account
Before you decide on switching to an online-only account, you first must understand all this entails. As we’ll see in the next section, there is a variety of accounts on offer, but the services that each provides is different. It may be that you only want to open an additional account that gives you convenience and freedom for some of your money.
In a separate article, we covered account switching services in full details. We identified that the CASS system is a hassle-free way to transfer from one bank to another. All of your payments, direct debits, and often your overdraft will automatically transfer within seven days. Thankfully, a number of online-only banks have not subscribed to the CASS service.
You can carry out the switch when you’re setting up your account online. All you need to do is have details of your current bank account, what you want to transfer over, and a date you’d like to switch on. The financial provider will then take care of the rest and is liable for any mistakes.
It usually takes seven days to transfer your account over, and there’s very little you have to do. Once it’s complete, payments to your old account will automatically be sent to your new online one.
The Best Online-Only Banks for You
Now that we’ve looked at how online-only banks work, it’s time to look at some examples. In this section, we’ve tried to cover the major players in the challenger bank market and the products they offer. We also look at some of the online -only banks’ pros and cons.
Competitive rates on both savings and mortgages.
Easy-to-use interface that allows you to keep track of your progress.
Protected under the FSCS.
Lack of services for everyday banking.
Rates are usually limited to a specific time.
Why we like it:
Atom Bank was one of the first online-only providers in the UK, launching back in 2016. Since then, they have gained an excellent reputation for their no-hassle savings accounts and mortgages. They’re one of the few companies of this kind that give you the opportunity to apply for a mortgage within their app.
The company has a full banking licence, and all of your money (up to £85,000) is protected by the FSCS. Atom has received a lot of positive reviews since it launched, thanks to its easy-to-use interface and competitive rates.
For savers, it’s possible to get 2.5% AER interest if you go with a 5-year fixed term. However, their table-topping rates are generally only on offer for a short period. Also, those looking for more traditional banking services will have to look elsewhere; Atom solely focuses on mortgages and savings.
Offers an easy-to-set-up current account that gives you access to your money all over the world.
Good rates on international currencies.
CASS on offer, meaning you can effortlessly replace your current account.
They don’t offer in-credit interest or savings accounts.
Overdraft fees can be expensive.
Why we like it:
Another early adopter in the market was Monzo. They also have fully licenced banking status, and your money (again, up to £85,000) is covered under the terms of the FSCS. It’s remarkably easy to get set up with an account; there are a few short verifications you need to make with the app, and you can be approved within a few minutes.
Monzo will send you a card that’s linked to your current account. You can use this to make payments and withdrawals abroad, without paying fees. However, they did recently introduce a limit on the amount of cash you can take out in a month.
It’s entirely possible to manage your finances solely through Monzo. It keeps track of your purchases, sends you notifications when you spend, and allows you to set spending goals.
Although you can set money aside to save, you won’t accrue any interest on it. Additionally, the overdraft feature can soon end up being expensive.
Fully-fledged current account with CASS, FSCS protection, and a wide variety of services.
Interest paid on your in-credit balance.
Low overdraft fees.
The interest rate is often lower than high-street alternatives.
Why we like it:
Exclusive Offer for You:
Much like Monzo, Starling offers all the features you need from a banking current account. Through their mobile app, you can set up an account, manage your payments and direct debits, and connect with a digital wallet. They’re also part of the CASS system, meaning you can transfer your existing current account to Starling without hassle.
The app similarly has some useful features, which means that all your essential information on spending and saving is right at your fingertips. One particularly attractive feature of a Starling account is that they pay interest when you’re in credit. You will get 0.5% AER on everything up to £2000 and 0.25% between £2000 and £85,000.
Starling also offers other financial services too, meaning you can sign up for a joint or business account, and apply for a personal loan. Through the app’s Marketplace, you can also find other services.
You’ll have access to an adjustable overdraft, but rates and limits on this differ.
Fee-free spending on international withdrawals and transactions, with a favourable exchange rate.
Excellent range of money handling features and security
Currently do not hold a banking license.
Fees for getting and replacing card.
Why we like it:
Although it doesn’t yet hold a full European banking license, Revolut is one of the most promising products on the market. The fintech company have put a large focus on offering the best option for travel spending. You can withdraw and make payments abroad in a wide range of currencies without paying a fee. Revolut also provides one of the best exchange rates among these types of services.
There is a premium service which charges a fee of £6.99. This allows you to make unlimited foreign currency exchanges, removing the £5000 per month limit for non-premium members. It also means you don’t have to pay for replacement cards, which are currently £6.
Security is very much a focus for the company too. Users can freeze their cards if they lose them, but reactivate them if found later. In addition, you can turn on a GPS feature which prevents payments being made if you’re not close enough to your phone.
Current account aimed at students, helping them manage their money.
Account set up is quick and easy.
Fee-free transactions when abroad.
Limits and fees associated with ATM transactions.
Money not covered under the FSCS.
Why we like it:
Loot’s banking service is aimed very much at millennials and students. With a simple setup and easy-to-use interface, you can get banking almost immediately. Part of their goal is to give customers the chance to budget and keep track of their spending and saving.
Like many of the services mentioned here, you get immediate access to your transactions. The app will give you alerts on your spending, and you can set a weekly budget. You can also make transactions abroad without paying any additional fees.
One slight negative is that Loot isn’t covered under the terms of the FSCS. However, as they mention on their website, they do not use customer money to invest, meaning it’s held securely until you access it.
Companion app for managing your existing accounts. Also offers fixed savings account and credit card.
Personalised saving advice and goals.
No current account or regular savings account just yet.
Not a replacement for traditional banking.
Why we like it:
Although the Tandem service is a little different from the rest, there are still some features that make it worth exploring. Essentially, this app brings together all of your existing accounts and cards. It monitors your financial activity and makes suggestions on how you can save and reduce spending. Tandem also offer a credit card and fixed savings account.
It’s a really useful way to take control of your finances and means you can track your spending wherever you are. The credit card offers an interest rate of 18.9% representative APR, as well as other features. With the fixed savings account, you could earn up to 2.40% AER over the course of 3 years.
Incredibly easy to set up and get started with.
Customers can open a UK and a European account.
Some features require a monthly fee of £4.95 to access.
There are fees for withdrawals and some deposits.
Why we like it:
Monese makes setting up a new bank account easy. Regardless of whether you’re in the UK or in Europe, you can quickly and efficiently get started with your account. So, if you’re a keen traveller or if you’ve recently moved to a new country, you can begin banking right away. Monese offers some pretty competitive exchange rates too, and you can transfer money internationally without incurring fees.
Although some of the features aren’t quite as good as other online-only banks, the fact that you can use or create a Monese account in 20 countries across Europe makes it one of a kind. You don’t even need a UK address to get started, and they don’t perform a credit check when you apply.