What is a Challenger Bank?

Why Are Some Banks Called Challenger Banks?    

There are all sorts of names for types of banks these days. We have challenger banks and neobanks and Banking as Service banks or BaaS banks. It’s not like it used to be when a bank was just a bank and things were black and white. No, things are changing! Banking is changing. Just like creative like-minded millennials choosing unconventional names for their offspring, it seems banking industry leaders are taking a similar approach to the finance industry, proving they’re just as tired of tradition as those of us raised in the 1980s and 1990s. I’m not criticizing the changing of these things, either. In fact, just the opposite—I’m on board with it! I gave my own kids crazy names they have to deal with. The kind of names that make grandparents roll their eyes and bite their tongues and share their hushed disapproval with friends at curling bonspiels and on the sidelines of pickleball courts. “I don’t know where they got that name from,” the grandparents say. “It sure is different.”

And they’re right! It is different. That’s entirely the point. It’s different and it’s deliberately different because so many of us are tired of the same. We’ve had the same for too long, and we know things could be better. For both millennial parents and banking leaders alike, it’s not about the name of the thing—it’s about what the name represents. It’s about the approach. It’s about being different, and not for the sake of being different but for the sake of influencing change. It’s about respectfully acknowledging the way things have been done and saying, it’s time to do something different. It’s time to be better. The logic goes like this: Tradition got us here, here is problematic, and it’s time for a change.

Let’s look at the Canadian banking industry. It’s been dominated by the same big banks that have been around for over 150 years! Some emerging banks look at that competition, and what do they say about it?

“We’re not a bank,” the emerging bank says. “We’re a challenger bank.”

And the much older traditional big bank bites its tongue and takes a seat on the bench. “I don’t know where they got that name from,” the big bank says to its fellow big bank pickleball friend. “It sure is different.”

And the challenger bank says “You’re right, big bank. We are different.”

And things start to change.

What’s a Challenger Bank?

In Canada, a challenger bank is a relatively new type of digital bank that competes directly with the big banks, operating without brick-and-mortar branches and offering banking services through a mobile app or website. Challenger banks are typically built on Banking as a Service (BaaS) technology platforms. This approach allows emerging challenger banks to partner with a pre-existing Schedule I bank in order to bypass the timely application process and regulatory obstacles associated with getting a full Schedule I banking license.

By building modern API-driven platforms that connect with existing banking systems, challenger banks can offer their own banking services and focus on more important areas of their solution, like their technology stack, the mobile user experience, and their brand. Although most challenger banks are designed on BaaS solutions, some may acquire a full Schedule I banking license. Ultimately, it’s their branchless, mobile-based banking strategy that makes challenger banks different and sets them apart.

The digital-only approach allows challenger banks to cut out the costs associated with the traditional brick-and-mortar banking model, allowing them to pass some of those cost-savings along to their customers—which they often do in the form of higher interest savings accounts. The ability to offer higher interest rates on savings accounts provides emerging challenger banks with an edge in the market, allowing them to compete alongside the big banks.

How competitive are challenger banks in Canada? Well, one Canadian challenger bank was recently reported offering interest rates on savings accounts that were 40 times higher than the big banks. You read that right: 40 times! On top of that, the same challenger bank reported record quarterly earnings just this month. (I should probably remind you that that’s also in the middle of a pandemic.) With those two figures alone, it’s undeniable that there’s a place in the market for these institutions to not just succeed but to thrive and change the way people experience banking.

EQ Bank is a great example of a challenger bank in Canada. The digital bank, officially launched in 2016, holds a full Schedule I banking license and currently boasts high-interest savings accounts that offer customers up to 30 times more interest than other banks. For anyone with any amount of money in their savings accounts, that’s kind of a big deal, and for many consumers, that also might be reason enough to make the switch from a traditional big bank.

Many more challenger banks are emerging in Canada with their own banking service offerings built as a service on top of existing banking infrastructure. Offering banking services that range from investment advisory and savings accounts to prepaid and credit card programs and more, these digital banks include brands like Koho, Wealthsimple, Neo Financial, and Stack.

A Brief History of Challenger Banks

Challenger banks are still a new concept here in Canada, having gained much of their traction in the United Kingdom over the past several years. But the origin of the challenger bank itself really dates back to 2008—and that’s being generous because it would be several years before these banks really started to emerge.

Following the 2008 financial crisis, regulators in the UK began to see how more banks could create diversification and lead to enhanced market stability, and they began to encourage new competition in the financial marketplace. As a result, regulatory changes took effect that included the implementation of a new regulatory framework for the financial system, along with the creation of a new bank start-up unit that provided support for constituents interested in setting up a new bank in the UK.

Banks that began to emerge from the new framework have leveraged app-based banking technology or Banking as a Service (BaaS) platforms to build disruptive digital banks with a focus on good design and a belief that customers are happy to conduct all of their banking entirely online. These UK challenger banks include Monzo, Starling Bank, and Revolut, which is currently building a waitlist for its Canadian launch date.

In Canada, challenger banks are focusing on this same digital-only approach in order to compete with the big banks. As a result, the name challenger bank has been quietly adopted here.

Why Are Challenger Banks Important?

The focus on disrupting the traditional banking model with exceptional digital user experiences and limiting banking services to the one place where people want to bank—on their phone—is the primary drive behind challenger banks.

Challenger banks acknowledge the 100-plus-year-old competitors they’re up against, and they’re creating convincing solutions to compete and show the industry that the banking experience can be different. They’re offering better incentives for personal savings, often with exponentially higher interest rates.

Most importantly, they’re showing consumers and the industry that we don’t have to keep doing what we’re doing just because that’s how it’s been done.

We’re tired of tradition. We’re ready for change. Sure, we can look at banking and continue to bank the way we have always banked. It works. Is working really all we care about? What if we looked at banking as a thing that can actually improve our lives?

Things can be different.

Sources:

https://www.investopedia.com/terms/h/high-street-bank.asp (Retrieved November 12, 2020)

https://en.wikipedia.org/wiki/Challenger_bank (Retrieved November 12, 2020)

https://www.newswire.ca/news-releases/equitable-bank-at-50-canada-s-challenger-bank-tm-celebrates-milestone-with-a-view-to-the-future-853523414.html (Retrieved November 12, 2020)

https://www.moneysense.ca/save/eq-bank-review/#:~:text=EQ%20Bank’s%20current%20interest%20rate,other%20online%20and%20traditional%20banks. (Retrieved November 12, 2020)

https://www.statista.com/topics/6290/challenger-banks-in-the-uk/ (Retrieved November 12)

https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit (Retrieved November 13)

https://www.goodhousekeeping.com/uk/consumer-advice/money/a29305253/challenger-banks/ (Retrieved November 13, 2020)

https://www.hydrogenplatform.com/blog/popular-challenger-banks-in-canada