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Challenger banks: are they really a threat to the Big 4?

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We examine the role of 'challenger' banks ahead of the introduction of new current account switching rules.

The banking industry has had a tough time regaining consumer trust following a string of scandals including bonuses, LIBOR rigging and PPI mis-selling.

The current record low interest rate enviornment has also not done much to alter savers’ attitudes.

So new ‘challengers’ to the traditional banking structure have generally been welcomed.

Over the past few years, there has a been a number of debuts by smaller, less well-known banks offering rates that stand-up well against those of the Big 4 traditional high street names – Barclays, HSBC, Lloyds Banking Group and RBS.

Although the definition of a ‘challenger bank’ remains murky, the general consensus is that it’s any new bank that challenges the Big 4.

Of course, not all small banks are challenger banks and not all challenger banks are small banks.

TSB, which re-launched into the UK market this week, is labelling itself a challenger to the market, although it was instantly handed 4.6million former Lloyds’ customers overnight and is now the 8th biggest bank by branch numbers.

Even supermarkets and old British favourites M&S and Tesco have launched so-called challenger banks.

Both traditional and challenger UK banks have to operate by the same rule book set by the regulator, the Financial Conduct Authority, and consumers’ money is still protected by the Financial Services Compensation Scheme (FSCS), so deposits up to £85,000 for a single account and £170,000 for joint accounts are still protected.

But can challenger banks really disrupt the market? Or are they just adding more clutter to the retail banking space?

Kevin Mountford, head of banking at MoneySuperMarket, says: “There is no doubt that challenger brands really can make a difference to competition within banking, however, the dominance of the Big 4 providers means that any new players will always struggle to achieve the scale of the main players.”

New rules being introduced next week making it it easier for consumers to switch current accounts may change things.

“The introduction of the new Current Account Switch Service will help break down some of the barriers that currently prevent people from switching so we will probably see many of the challenger brands competing for this business,” Mountford said.

“As we have already seen, many of the new brands have developed niche propositions which are aimed at their target market. M&S Bank, for example, has developed products which are specifically aimed at M&S shoppers and have been successful in attracting customers who have an affinity with their brand.

“Sadly, apathy is still the biggest barrier to switching in the market, and until this changes, the big banks will remain a dominant force, but there is no doubt that challenger brands are helping drive innovation in the market as banks look at ways to retain existing customers by enhancing products while new players incentive customers to switch.”

People planning on moving to a challenger bank are being urged to do their homework and read the fine print. Some headline rates may look great from the outset, but might end up being paltry once bonus rates end.

Some challenger banks can also have restricted access and very few branches, therefore consumers need to check and be satisifed with how they can access their funds and operate their accounts.

Anna Bowes from says: “I would advise that anyone looking around to switch when the new rules come in should make sure that they look at the whole of market for the best deal that suits them and read all the fine print. Some ‘easy access’ savings account will only let you withdraw a few times before the savings rate plummets, and people need to be aware of that.”


Challengers banks offering the top rates


Provider Switching Incentive Minimum Monthly Funding In-Credit Rate (AER) Authorised Overdraft Rate (TYPICAL EAR)
Danske Bank (UK) – Danske Choice £100 – Conditions Apply N/A 0.00% £100 interest free, 3.79% thereafter
Handelsbanken Handlesbanken offer a tailored service therefore interest, fees and charges are all set dependent on a customers profile.      
Metro Bank – Current Account N/A N/A 0.00% 15.00%
Smile – Current Account N/A N/A 0.00% 12 months £500 interest free thereafter 18.9%
TSB – Classic Account N/A £1,000 £1+ – 1.50%£1,000+2.00%£3,000 up to £5,000 -3.00%

up to £10 free. Monthly overdraft usage fee of £6 plus 19.94%

 As at: 11.09.13



















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