How Safe are Challenger Banks?

How challenger banks work, the main players in this market, the pros and cons of using a challenger bank, and how they compare to the traditional banks.

Updated: May 21, 2024
Rebecca Goodman

Written By

Rebecca Goodman

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You’ve probably heard of the term ‘challenger banks’ before but what does it actually mean? In reality, it’s a bank that works in a similar way to the high street banks but with a few key differences.

In the last few years the face of UK banking has changed dramatically, partly thanks to the coronavirus pandemic which saw the rates of contactless payments rise.

Hundreds of bank branches have also closed, leaving people with little option but to choose online or app-based banks instead.

Challenger banks were initially called this name because they set about to challenge the traditional high street banks which dominated the banking scene.

While the traditional banks are still there, lots of challenger banks have appeared giving people more choice when it comes to banking.

In this guide I’ll be looking at how challenger banks work, the main players in this market, the pros and cons of using a challenger bank, and how they compare to the traditional banks.

What is a challenger bank?

Challenger banks come in all shapes and sizes but most are either online or app-based and offer a range of traditional banking features, such as a current account, debit card, and savings accounts.

They are often top of the tables when it comes to savings rates, and in the last year the traditional banks have been accused of not passing on interest rate changes fast enough, while the challenger banks reacted and increased the rates they pay to savers.

This is because challenger banks usually have lower operating costs so can pay savers more money through interest. 

They also operate with the latest technology, allowing them to respond quickly to moves in the market. When the Bank of England (BoE) changes the base rate, for example, challenger banks can usually react immediately by increasing (or decreasing) the rates they offer.

Most UK challenger banks are also protected by the Financial Services Compensation Scheme (FSCS) and authorised by the Prudential Regulation Authority (PRA). This means any money you put into one should have the same protection as money with a high street bank. 

How does a challenger bank work?

Challenger banks work in a similar way to traditional banks, offering banking services to people in the UK. The services on offer vary — with some just offering a current account and others offering savings accounts or credit cards.

They also often offer services not available with the traditional banks, such as real-time spending alerts, budgeting tools, and tools to help with spending and saving. Most challenger banks also have low, or no, fees when you use them abroad.

Most challenger banks are online or app based, so to sign up you’ll need to visit their website or app. The sign-up process is usually quick and if you meet the requirements of the bank, you should be able to set up an account within minutes.

You will have to give some documentation too, as you would with a high street bank, such as your passport or driving licence to show proof of your identity. 

The switch to a challenger bank should be straightforward, thanks to the Current Account Switch Service (CASS) which ensures the switch happens within seven days. You can use this service when switching to any bank, if they’re signed up to it, and it means the banks have to sort out any outstanding payments and switch you over within the week. 

What are the different types of challenger bank?

There are around 30 challenger banks in the UK to choose from, and if you look across the best buy tables — especially of savings accounts — you’re bound to spot a few of them.

Each bank works differently but they can be broadly split into the following categories:

Type of bankExample of bank
App-based banksMonzo, Revolut, Starling, Atom, Monese, Chime
Digital or online banksTandem, OakNorth, Chase, ClearBank
Shari’ah-compliant banksBank of London and the Middle East, Al Rayan, Gatehouse Bank
Banks with a high-street presenceTSB, Virgin Money, Metro Bank

Are challenger banks safe?

One of the big questions asked about challenger banks is — are challenger banks safe? — and many people are put off choosing them because they’re unsure about the protections in place. 

But any UK challenger bank needs to be authorised by the PRA and the Financial Conduct Authority (FCA). You can check if a bank is registered by checking the FCA register

This means up to £85,000 of money is safe under the FSCS if a bank were to go into administration.

What is the difference between a challenger bank and a traditional bank?

If you’re happy to bank online, or via an app, a challenger bank can usually provide the same services as a traditional high street bank.

Although some challenger banks do have high-street branches, the majority do not. Therefore, if you’re after a bank with a branch you can visit, and a person you can speak to face to face, a challenger bank with only an online presence won’t be the best option for you.

Challenger banks also tend to beat the high-street banks when it comes to their customer service levels. In the most recent banking satisfaction study from the Competition and Market’s Authority (CMA), for example, challenger banks including Monzo and Starling came out in the top spot.

What are the pros and cons of challenger banks?

Before you make the switch to a challenger bank, you will want to take a look at the pros and cons.

Any bank you choose with have its own set of pros and cons but when looking at challenger banks overall, here are the main benefits and drawbacks to consider:

Pros:

✔️ Quicker to set up online, or app-based banking

✔️ Same protection as the high street banks

✔️ Savings rates tend to be higher than with traditional banks

✔️ Often have better customer service levels

✔️ Use the latest technology so they can offer a range of financial gadgets and tools to help customers manage their money

Cons:

❌️ There may not be a physical branch to visit

❌️ You’ll need to open the bank online or via an app

❌️ Some banks don’t accept cash deposits (or do only at Post Office branches)

What are the main challenger banks?

The list of challenger banks is changing all the time, and it’s likely to grow.

There are a few big names that have been around for quite some time now. They include Revolut, Plum, Starling Bank, Atom, Monzo, and Monease. Here’s a list of some of the other challenger banks available:

  • Al Rayan Bank
  • Aldermore
  • Bank of London and The Middle East (BLME)
  • Chase
  • Claro
  • Curve
  • Kroo
  • Nimbl
  • Raisin
  • RoosterMoney
  • Shawbrook Bank
  • Tandem Bank
  • Tide
  • TSB
  • Tuxedo
  • Wise

What’s next for challenger banks?

As things like Open Banking become more common, challenger banks are expected to keep appearing.

Any bank can use this technology but challenger banks have been able to take advantage of changes in the industry to offer customers a huge range of tools to help them track their savings and spending, via Open Banking. This is just one area where challenger banks have the edge over more traditional high street banks at the moment.

As the number of bank branches continues to decline, challenger banks also have a place as an alternative option to the traditional banks.

The number of bank branches in the UK fell from 14,689 in 1986 to 5,745 in 2023, according to data from the British Banking Association (BBA) and the Office for National Statistics (ONS). It’s the same story for building societies too, and over the same period the number on the UK high streets fell from 6,954 in 1986 to 1,925 in 2023.

The continued decline of bank branches leaves many customers looking for alternatives, and this is where challenger banks — which often pay higher rates of interest, offer more advanced money management apps, and have better customers service levels — can play a part.

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