What Are Challenger Banks and How Are They Disrupting Finance?

You might be surprised to learn about so many challenger banks cropping up globally. They’re offering services on every end of the spectrum, from free for all service models to a focus on corporate clients. Some are even specifically for crypto. Whether its savings accounts, loans, or mobile credit card services, this new banking paradigm has recently shifted from its tentative pace to an accelerated transformation.

Challenger banks have been slowly disrupting the way we look at banking services for years. They are breaking away from the traditional, brick and mortar and centralized banking system we’ve all known. Soon, we may all be using a challenger bank and consider it a normal part of life. Maybe we already are using one!

But for now, what we have is a myriad of new startups each trying to carve out their niche in the new era of banking. Join us as we look at some challenger bank projects from all corners of the earth. We’ll find out how they might alter for good the landscape of banking and finance.

Please note that as we describe the various challenger banks, we are not recommending one over the other. We’re simply describing the different types that are out there. That way, we can come to an understanding of how this new form of banking will be taking shape.

What is a Challenger Bank?

A challenger bank can be broadly defined as a small to a medium-sized enterprise that is offering bank services without the heavy infrastructure, legacy systems and slow innovation rate of traditional bank technologies. By inserting themselves into the market, they are giving institutional banking a run for its money.

Sometimes challenger banks are established firms that take on a new direction. Others, like so-called Neobanks, tend to rely primarily on digital technologies and mobile banking services. But in both cases, these upstarts will have much less baggage as they compete for a market share.

How are they different from traditional banks?

Usually, challenger banks are smaller than big banks and thus don’t carry the legacy-slowed rate of innovation of traditional finance. As such, challenger banks are highly adaptive, often running global, digital platforms using cutting edge technologies with a focus on mobile banking.

What services do they provide?

Most challenger banks are modeled after traditional financial institutions. But there are a few in the crypto realm that are not at all like traditional banks. We’ll cover those as well in this article. But all of these challengers are different from banks in that they are usually smaller and more technologically focused. Their attempt to gain a market share amongst giants relies on their:

  • Adaptability
  • Mobile readiness
  • Use of the latest in fintech
  • Lack of sluggish legacy systems.

But these outliers often provide the same services that a big bank does without the branch offices (high overhead), huge staffs (more expense) and accompanying high fees.

While it varies between challenger banks, some of the services you can receive include:

  • Consumer Lending
  • Savings and Checking Accounts
  • Merchant accounts
  • Mobile banking
  • Credit Cards
  • Cryptocurrency trading, buying and selling
  • Investment accounts
  • CD’s
  • Retirement savings

The downsides

One of the downsides of challenger banks is that they often do not offer a full suite of banking products and services. Some may offer just mortgages, while others may just provide credit cards.

But in today’s western society, people often have multiple banks that they use for different reasons. For instance, they may have their mortgage with online QuickenLoans, a credit card with JP Morgan, a car loan at the local credit union, and their investments with Fidelity.

But it is not the fully banked societies who are need of these new offerings. The market potential lies largely within the more “unbanked” regions of the world.

A second downside may be the loss of ‘in person’ customer service. When you have a problem with an account, it seems easier to call your local branch where they know you, or even drop in. That becomes an impossibility with most challenger banks. But, our mobile ready population is increasingly leaning towards digital banking.

Where can you find challenger banks?

Currently, we are seeing new projects cropping up everywhere, from Switzerland to Canada to South Africa. Globally we’re seeing over a 100 challenger banks now in some stage of development. The emergence of blockchain technology applications in finance has infused the niche with added consumer interest, energy, and funding.

The UK, in particular, has been a hotbed for growth in this sector, which is no surprise because:

  • They have a centuries-old banking infrastructure.
  • The UK’s banking industry moved into the digital space much earlier than other countries (including the US). So they have more years of digital banking focus.
  • They’re not as saturated with mega banks and branches as the US .

Out of the many competing challenger banks in the UK, Monzo and Atom Bank raised over $93 million and $140 million respectively in venture capital investments during 2017.

A Sampler by Region

In this section, we’ll look at three distinct regions and one challenger bank project for each region. The hope is to get a general idea of how challenger banks are operating in different areas, to give us an idea of the trends in this industry.

Region #1 – European Union: Spain

2Gether

challenger banks

Calling themselves the world’s first collaborative bank, Spain-based 2gether.global says it’s not a bank. Instead, 2gether is basing its foundations on a credit union model. So the banking platform is built to benefit all account holders, who are also considered owners of the ‘bank’.

2gether is not licensed as regular banks are, but it makes this statement regarding how it protects customer accounts:

“…money is managed by Pecunia Card E.D.E., an Electronic Money Institution regulated under the directive 2009/110 of the European Commission”

Available now to the 19 EU countries, 2gether plans on eventually opening up to the global market. A European ID or passport is required to set up the app. Once you have it, you’re able to access their services, which include:

  • A Chance to apply for a 2gether VISA and use it to spend fiat or cryptocurrency
  • A wallet with peer to peer payment facilitation
  • The ability to purchase crypto

To learn more, you can read the white paper.

Region #2 – Asia: Vietnam

Timo

challenger banks
Source: https://www.2gether.global/

Having begun operations in 2016, Timo was the first digital bank to open in Vietnam. They collaborated with a local, traditional bank to offer a suite of banking services online, including:

  • Online banking for account management
  • Sending peer to peer money with a phone number
  • Flexible term deposits
  • Fee free banking
  • Real-time bank transfers
  • Bill Paying
  • Insurance products

The name, “Timo”, means “Time is Money” and coincides nicely with the idea of challenger banks. The convenience of banking from your phone can save users a lot of time.

Though their clientele started out to be mainly from Vietnam, Timo’s base is expanding to Indonesia and the Philipine markets.

Region #3 – South America: Venezuela

Bitcoin

challenger banks

This article would not be complete without including bitcoin as a challenger bank. Even though at this stage it is difficult for many to transact in BTC, global adoption of cryptocurrencies is gaining speed with more and more banking services that use BTC now under development.

Nowhere is the need for challenger banks so evident than in current day Venezuela. Just a few weeks ago, BItcoin reached its highest trading volume ever in the country. With skyrocketing hyperinflation and a government in crisis, some consider the money problem in Venezuela to be unsolvable.

challenger banks

But with Bitcoin, the people of Venezuela have a chance to partake in a global currency that is incorruptible and accessible to all. With a bitcoin wallet, users can:

  • Send peer to peer payments for pennies. This could include those expats who want to send money home to their struggling families. Or it could mean using BTC to pay person to person for goods and services.
  • Have savings that cannot be horrendously devalued by a government that is in default and a deep recession.
  • Conduct business without having to use the rapidly devaluing Bolivar.

Maybe bitcoin is not like some of the other challenger banks, but it certainly is filling a need in Venezuela.

Summary

Hopefully, this guide to challenger banks and what they are has been helpful and illuminating. The future of banking is very likely in the hands of these technologically advanced ‘banks’. We’d like to conclude with a recent LinkedIn post by Linas Beliunas, which aptly and graphically lays out the building popularity of challenger banks. Follow us on Twitter get all the latest news on cryptocurrency trends as well as updates on our HedgeTrade tokenized app.

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