Challenger banks, so hot right now

A new breed of digital-only challenger banks is on the rise, and they are all going after the incumbent banks revenues. While the jury is out on whether these new entrants pose a real threat to the established banking industry, the challenger banks should not be underestimated.

Expat and immigrant bank Monese raised $10 million this week from Anthemis Exponential Ventures, STE capital, and Korea Investment Partners. The company are planning to use the capital to expand their reach to European countries outside the UK. Since their launch in September 2015, Monese have obtained 40,000 customers from over 179 different origin countries. The bank also recently changed their business model from a freemium model to a flat subscription fee with full transparency and no hidden fees.

Tandem is another UK challenger bank that just raised £35 million from high street retailer House of Fraser. Tandem, which gained its banking licence last year, is an app-only bank that currently offers a savings tool that lets people monitor spending on any bank account. Tandem has so far rolled out its mobile app to more than 10,000 customers and plans to launch current accounts and credit cards later in 2017. The department store aims to utilize this platform in order to enter the financial services space, and increase the number of touch points with their customers.

Lunar Way is the bank for the snapchat generation (quote Ken Villum Klausen), which rather than obtaining their own banking license is partnering with local banks. The bank is aiming at the Nordic market, and secured €4,2 million in funding from SEED Capital Denmark and several undisclosed investors before launching outside Denmark.

Challenger bank, Atom is raising the stakes by moving into mortgages ,and is promising to make securing a mortgage quicker and easier than their big four counterparts. At launch, the only product Atom offered was a fixed-saver account – current accounts, debit and credit cards. With a market leading mortgage arriving in 2017, Atom is confident that UK banking customers will finally ditch their traditional brick and mortar banks in favor of a digital only bank.

For many fintechs, becoming a challenger bank is becoming a natural next step in their evolution. P2P-lender Zopa is applying for a banking license, and they are not the only fintech considering becoming a bank. Affirm have also expressed interest in becoming a bank, in order to take deposits. Others, such as student lender SoFi, have elements of their business that already resemble banking.

However, becoming a bank is no walk in the park. While it is compelling to focus solely on simplicity and new functions, security and robustness should be top priority. Research fellow and PhD student Vincent Haupert at the University of Erlangen-Nuernberg recently revealed numerous security holes in challenger bank N26 mobile banking apps that made it possible to hijack individual customer accounts. “They say you can open a bank account in just eight minutes, as it turns out, you can lose it even faster.” Is Hauperts response to the security breach.

At the end of the day the only thing that matters is the ability to deliver upon customer expectations,  and challenger banks are promising to deliver better returns on savings and lower interest rates on mortgages through transparent and agile digital platforms.