6 July 2022
The UK is home to a powerful triumvirate of challenger banks, made up of Monzo, Revolut, and Starling Bank. Competition has always been fierce between these companies, with lofty investments being secured, international expansions, 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.
Read on for a rundown of the UK’s high-growth digital banking sector or download our list of the UK’s top challenger banks below.
Download the full list of top UK challenger banks for 2022.
What is a challenger bank?
Born out of an attempt to change UK banking in the wake of the 2008 financial crisis, challenger banks, or neobanks, exist to disrupt incumbent firms—high street banks such as HSBC, NatWest, Lloyds and Barclays—and provide more personal and efficient banking experiences through their competitive pricing, mobile apps and real-time payment notifications.
Our definition of a challenger bank excludes companies offering limited bank-like services, such as P2P loans, currency exchange or pre-paid cards. When we talk about challenger banks, we mean deposit-accepting institutions that have (or are intending to apply for) a banking licence. We also don’t consider subsidiaries of established parent banks as challengers.
How do challenger banks differ from traditional banks?
The early wave of UK challenger banks included Metro Bank, the first high street bank to launch in the UK for 150 years, alongside TSB and Virgin Money. More recently, however, we’ve seen the rise of digital-first banks like Monzo, Revolut and Starling Bank.While challenger banks provide similar services to traditional retail banks, including current accounts, savings accounts, credit and debit cards, mortgages or loans, they typically don’t have physical branches, instead offering online banking services via mobile apps. The majority of challenger banks in the UK are smaller digital banks like these, and were founded within the last 10 years.
Are challenger banks safe?
Whilst there’s mounting interest in neobanks, it seems they may not have gained people’s trust just yet. In fact, a recent YouGov study found that only 17% of people in the UK trust challenger banks as much as their traditional counterparts. But how safe are challenger banks really?There are many companies in the UK that market themselves as challenger banks, but are in fact e-money or payment institutions, like Monese and Pockit. For companies with an e-money licence, customers’ money is held by a partner bank and cannot be invested or loaned, and is thus not subject to Financial Services Compensation Scheme (FSCS) protection—although the Financial Conduct Authority (FCA) does still regulate these firms.Whereas, for challengers with banking licences, deposits are held by the bank themselves and protected by the FSCS (up to £85k). In the UK, banking licences are authorised by the Prudential Regulation Authority (PRA), with consent from the FCA, and certify that a bank has met strict legal criteria required to ensure their customers’ funds and data are kept secure.
What does the UK’s challenger bank sector look like in 2022?
It’s safe to say that fintech innovation has succeeded in disrupting the financial services space. Since our records began, back in 2011, the UK’s fintech sector has seen meteoric growth. Fintech was the UK’s top-performing sector last year and is showing no signs of stopping, with 26p in every £1 of equity investment secured in Q1 2022 going to fintech companies.Of the UK’s current unicorn companies, 1 in 2 are fintechs, including four of the biggest challenger banks: Revolut, Monzo, Starling Bank, and OakNorth (all based in London, the fintech capital of Europe). And according to Plaid, last year, fintech adoption among digitally active consumers reached 86% in the UK—a six-fold increase from 2015. At the start of the COVID-19 pandemic, however, use of challenger banks fell by around 90%, compared to just 60% for traditional ones. Despite these concerns, overall, COVID seems to have accelerated the shift towards digital services for many customers.Challenger banks are generally seen as a more convenient method of banking, typically providing improved customer support, without the need for face-to-face interactions. This has prompted a mass migration towards challengers in recent years, that’s put pressure on traditional banks to improve their mobile banking services and digital offering. RBS’s (short-lived) attempt at creating its own app-only bank Bó is a prime example of this. Last year, JPMorgan launched its own digital bank Chase, in an attempt to stay competitive and respond to shifting customer demands. Chase offers challenger bank-style perks, like 1% cashback on all spending, but the company recently announced they expect it to lose more than $1b over the next few years.Investors are putting significant amounts of money behind challenger banks, seeing long-term potential in the sector. Since 2011, high-growth UK challenger banks have secured 149 equity deals, amounting to £6.55b in total investment—a rather impressive feat given how nascent an industry it is. Funding figures have doubled from just seven announced deals in 2014 (worth £428m) to 14 deals in 2021 (worth an impressive £1.83b). Indeed, 2021 was a record year for pounds invested into challenger banks in the UK, up 134% from 2020 (£781m). Top investors in the sector last year included Schroders, Softbank Vision Fund, and Tiger Global, thanks to their £578m round with Revolut.
Who are the main challenger banks in the UK?
Of the equity investment secured by UK challenger banks in 2021, 64% went to the UK’s three main challenger banks, across just six funding rounds. Monzo, Starling Bank and Revolut are among the UK’s top five fintech companies, but how did these industry leaders first come to be?
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 ability to top up and hold several currencies combined with the free currency exchange and ATM withdrawals. Prior to working on Revolut, Storonksy—the 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.Since launching, Revolut has expanded globally, and now offers several additional features, such as 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. In 2017, the company also launched Revolut Business, with added features such as company cards, expenses, and custom software integrations.Revolut has secured £1.27b in equity fundraisings so far, across nine rounds. And according to its website, it now has more than 18m personal users and 500k business customers around the world, with over 30 in-app currencies. Its latest round of investment, in July 2021, will be used to fund further product development and expand its marketing efforts, particularly in the US, India and Latin America. In late 2021, it also acquired talent sourcing marketplace Wanted and point-of-sale provider Nobly.
Quickly following was Monzo, first launched in early 2016 as ‘Mondo’. Monzo’s founding team met whilst working at rival venture Starling Bank, ultimately leaving the company in 2015 to start their own company, under Starling’s then-CTO Tom Blomfield. In May 2020, Blomfield stepped down as Monzo’s UK CEO, being replaced by its existing US chief executive TS Anil. Despite initially remaining at Monzo as President, he has since left the business.
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 personal current accounts and joint accounts, with a strong focus on savings and borrowing (through both overdrafts and loans) for consumers. It also offers business accounts, with integrated accounting and tax pots, plus multi-user access for small companies. In 2020, the company announced a new premium service, Monzo Plus, for a small monthly fee.
Since its formation, Monzo has secured £927m worth of equity deals, across 17 funding rounds. Most recently, in January 2022, it received £73.0m from Chinese tech company Tencent. The company currently boasts more than 5.6m customers with a Monzo bank account, and was named the Best British Bank of 2022.
Whilst Starling Bank is the most recent of the three big challenger banks, having launched in the UK in mid-2017, 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 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 book, Banking on It, details the company’s founding, including her fallout with Blomfield and their conflicting visions for the company.Alongside business banking, Starling currently offers four current account options—personal, joint, euro, and teen—plus a debit card for kids, ‘Starling Kite’. The bank also introduced a number of new features during COVID-19, specifically built to support customers during the pandemic. These included government-backed lending for small businesses, mobile cheque deposits, and its new Connected cards for people relying on friends and family to shop on their behalf.
To date, Starling Bank has raised nine equity funding rounds, amounting to £715m in investment, and opened more than 2m customer accounts. Thanks to strong customer reviews, it ranks first on the Which? customer satisfaction table (just ahead of Monzo and Triodos Bank). In July 2021, the bank completed its acquisition of buy-to-let specialist lender Fleet Mortgages. Starling secured its most recent fundraising in April 2022, totalling £131m, with existing backers Goldman Sachs, Fidelity, Qatar Investment Authority, RPMI Railpen, and angel investors.
New digital banks in the UK
Of course, there were other challenger bank startups surfacing around the same time as these three, albeit operating on a smaller scale. Some challengers have tried to set themselves apart through their focus on ‘green finance’, for instance, such as Tandem (first founded in 2013) which now offers eco-friendly lending initiatives, alongside its instant bank transfers. Meanwhile, others have taken the B2B route and hence a lower profile, despite being some of the top challenger banks for businesses—OakNorth and Atom Bank are among the most notable (both also founded in 2013).Despite massive amounts of investment in recent years, and rising user numbers, many of 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 had a particularly hard time of it during the pandemic, with annual post-tax losses growing to £113.8m in 2020 (up from £47.2m the year prior) which it put down to the impact of COVID-19. The bank also saw a 40% drop in its valuation.
Not everyone has suffered, however. Starling announced in April that it had not only survived the pandemic, but had been in profit for the past 18 months. And when comparing the three big players, Revolut earns the most revenue per customer, whilst Starling has the most diversified revenue stream and holds the most deposits per user.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 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, it 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 £250m in equity investment, across 10 rounds, between July 2014 and June 2022.Another recent arrival is ClearBank, the UK’s first purpose-built clearing bank in more than 250 years, which launched in early 2017. Clearing banks are authorised to move money between organisations and individuals, and 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 integrations and real-time access to payment schemes like Bacs. To date, the company has secured £351m in equity fundraisings.Then there’s Bank North, a Manchester-based fintech aiming to disrupt the UK’s SME lending industry. Previously operating under the name B-North, the bank rebranded earlier this year, after receiving its full banking licence. Whilst founded in 2017, Bank North isn’t due to launch until later this year—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.Also in the works is Fiinu (currently in the pre-application phase of obtaining its licence), which is aiming to transform the UK’s short-term borrowing landscape and help customers improve their credit scores. Meanwhile, having received its restricted banking licence in August 2021, new kid on the block Kroo plans to launch its current account offering this year. The ‘social bank’ currently operates as an e-money institution, with a debit Mastercard and mobile app that enables customers to manage their shared spending more efficiently.So 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 fintech startups are transforming modern-day banking. But should traditional banks be worried? 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.
23 of the UK’s top challenger banks
There are currently 23 challenger banks in the UK that have met one or more of our high-growth triggers. As Beauhurst only tracks private businesses, this does not include challengers that have exited, such as Metro Bank. For a full breakdown, including where UK challenger banks are based, how much funding they’ve raised, and their target markets, download our complete list of challenger banks below.
Download the full list of top challenger banks in the UK.