There's a lot going on in the world of challenger banks these days. They're regularly topping the best buy tables, boasting everything from the best ISA rates to market-leading notice accounts, and many of them are known for offering great service, too. The question is, just what – or who – are these challenger banks? We take a closer look.
DEFINITION: A relatively small retail bank set up with the intention of competing for business with large, long-established national banks (Oxford Dictionaries).
This, in a nutshell, is what a challenger bank is. It's a bank that's far smaller than a national brand that's been specifically designed to compete with the Big Four (HSBC, Lloyds, Barclays and RBS), be it through offering superior service, better deals, or more often than not, a combination of the two.
Some challengers are true newbies and are still finding their feet, while others are becoming established in their own right. Charter Savings Bank, for example, launched earlier this year and solely offers savings products (many of which instantly secured places in the Moneyfacts charts), while Metro Bank launched in 2010 and already has 36 branches scattered across
Other challengers you may (or may not) have heard of include Aldermore, Shawbrook Bank, United Bank UK, State Bank of India, Tesco Bank and Harrods Bank, to name but a few. The sector is growing all the time, and with several banks having their licence applications being considered by regulators, the number of challengers could swell even more – great news for those hungry for more competition in the sector.
It's interesting to note that many of these newer banks have an online presence rather than a physical one, so don't expect to see many of them on the high street (the likes of Metro Bank and Virgin Money being the exceptions). Really, this shouldn't be too much of a concern for many customers – people are increasingly turning to online and mobile banking anyway, and many challengers still offer ways for people to pay in money at a counter (through partnerships with other banks, for example).
Crucially, these new banks still rely on customer deposits to build their balance sheets and lend money to people, which is why they typically offer far better interest rates than their well-known counterparts. It's for this reason that they're dominating the best buy tables and are easily beating the big names, so they really could be worth considering.
Challenger banks don't have the legacy issues associated with the big names (they haven't needed to be bailed out and weren't caught up in the PPI scandal, for example), so really, they're coming to market with a clean slate and a reputation that's ripe for building. However, some people are put off by the fact that they're not so well known, and others are still strangely loyal to their big name bank. Well, they shouldn't be!
Challengers may be small, but they still have to comply with the same rules and regulations as traditional banks, and your money will still be protected under the Financial Services Compensation Scheme. The limit may be reducing at the start of next year, but that applies to all banking institutions, so your money will be just as safe as anywhere else.
Think it's time to take the plunge? Then get searching! You'll be able to find out more about individual banks by reading our provider pages when they're launched in the coming weeks, but in the meantime, make sure to do your own research. Check out our best buys to see just how good challenger deals can be, and remember that loyalty doesn't pay – if your bank isn't offering the service or product you want, vote with your feet! The Current Account Switch Service makes it easier than ever to do just that, and challengers are definitely worthy of consideration.