Challenger banks have been making the headlines for a few years now in countries all around the world. In an industry where the banking behemoths often find it difficult to affect change at a fast pace, the promise of easy to open, easy to operate accounts with great user features has been attractive for many people.
So what is a challenger bank? Basically, they are a new collection of smaller banks looking to compete directly with the more traditional, established banking system. Most of them are founded on ‘digital first’ principles, meaning that they do not have any branch based bank accounts at all. Despite what some people might say, they are officially licensed banks and they are definitely disrupting the status quo where financial services is concerned.
While the US was slightly behind the curve in its move towards a new style of banking, the COVID-19 pandemic has actually provided a huge source of new customers for these institutions.
Challengers such as Current, Chime, and Varo Bank have seen a flood of new customers over the last 18 months. This has primarily been due to the fact that people have been forced to stay indoors more or businesses have been shut during local lockdowns, therefore the need to buy goods online and run your bank account online has increased.
Also, the government stimulus checks needed to be deposited in an account, so many people look to accounts that could be opened fairly easily online with few checks or the need for notary public approved documentation that some of the more traditional banks require.
Many of the challenger banks were also able to offer pre-funded deposits on stimulus checks. This meant that money was available to customers a lot quicker than they were from the big banks. This was a huge incentive indeed for many people who were experiencing financial difficulty due to the pandemic.
Challenger vs established banks
Many of the challenger banks that are around today sprang from the aftermath of the recession back in 2008. They looked to capitalise on the mistrust of the older institutions and offer a new, open and refreshing approach to banking. Because they were ‘tech first’ their had the jump on developing new banking an budgeting tools to make everyday money management easier and more transparent.
Younger generations in particular, flocked to these new accounts which offered an experience that matched how they already interacted with other apps.
Pros of challenger banks
Easy account opening
Because these accounts are run entirely online, they can be applied for and opened digitally. That means no making an appointment at a bank and turning up with the necessary paperwork and ID. The process is streamlined so that the legal requirements are still covered, but the emphasis is on convenience.
Many of these accounts can be up and running in a couple of hours.
Online customer service
Many challenger banks have in app customer service facilities. No lengthy phone calls or waiting in line to speak to someone. Help is just a chatbox away.
A lot of these account are free to use and have lower (or no) chargers for most transactions and services.
They are more agile in their tech capabilities
The apps the run accounts are fantastic in their range of features. You can set and review budgets, assign spending to categories and get an instant overview of how you spend your money.
Many traditional banks don’t have these facilities. As is common with older, larger organisations, the ability to get things done is slowed down massively.
Cons of challenger banks
No direct contact
Some people just prefer doing their banking in person. It might be old fashioned but it still accounts for an not insignificant amount of people. Or those who do not or cannot use technology to run their accounts.
No cash/check facilities
If you’re running an account that has a lot of cash of checks being deposited into it, then this isn’t going to be possible with a challenger account in most cases. They are built primarily online transactions.
While still relatively new, challenger banks have been around long enough to make an impact and draw many customers to their digital-friendly way of doing business. The COVID pandemic has accelerated this trend, as challengers stepped up to offer speed and efficiency in areas where the big banks were dragging their feet somewhat. As the majority of Gen Z are now of an age where banking is required, expect the challenger banks to become the first stop for many younger people who couldn’t imagine banking any other way.