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Confused With The Term ‘Challenger Bank’? Let Us Explain…

Without a doubt, technology in its ever-developing form is reshaping the world. With the speed of digitalisation and the rise of new players in the market, it is often difficult to keep up with all the new jargon that is becoming an inherent part of explanatory language. This is especially true for the banking sector!

The unstoppable development of digital finance is transforming the landscape and we are witnessing the birth of new banking alternatives. Maybe you’ve already heard of ‘challenger banks’ or ‘neobanks’ and the innovation they are bringing using various methods of deep tech.

Either way, let’s break it down from the beginning!

The Merging Of Two Industries. We Call It ‘Fintech’.

As the name suggests, fintech is a blend of two worlds; finance and technology. Broadly, we can say it is any technological innovation in the financial services sector. It seems obvious, right? But how can it really benefit when these two industries are pulled together?

The rapidly growing banking start-up scene is challenging established players in the market on the way business should be done; offering an optimised and more personal experience. This includes a streamlined user interface, speed of operation and reduced fees on services. Also, they are completely digital, often utilising mobile technology which makes it possible to access services anywhere and anytime.

Nevertheless, it is important to consider that the majority of these start-ups do not hold an actual banking license. That means that they fall under the rules governing payment services and thus, they still need to rely on a bank to properly operate.

Physicality Of Traditional Banks

Traditional banks have been with us for centuries. Long established institutions operate with a banking license offering many of their own suite of products to their customers. Due to their rigidity they are very slow in digitising their services which results in people’s frustration and an evolution of the challengers.

However, these banks provide the option of operating physical branches and offering face to face interaction to their customers. Moreover, they operate their own ATMs giving people the opportunity to withdraw money. This is especially important in countries not as digitally developed where certain services and stores are not as freely accessible.

A New Way Of Banking, Meet The ‘Challenger Banks’.

The slow process towards digitalisation and innovation opened the space for alternative financial services to enter the market. As the demand for a new wave grew, the challengers garnered a popularity, especially among millennials, faster than expected. So, what are the challenger banks in reality?

These relative newcomers to the market are engaging with their customers through digital means, namely mobile apps. They are called ‘challengers’ because they challenge the traditional banks either with the products they offer, with the user experience or the business models.

These pure fintech entities are completely independent from any other banks or financial institutions. This gives them more freedom and thus, they tend to be more open and transparent with their clients.

Digitising The Traditional With Neobanks

Neobanks are also newcomers to the industry and as much as they are sometimes used interchangeably with challenger banks, they are essentially different. They are in nature digitising financial services, however, they are not entirely independent.

They could be perceived as a spinoff of traditional banks or be so called a ‘frontend of traditional banks’ as they are usually backed and supported by them. They are 100% new but they do not hold a banking license, so they can be only an addition to a traditional bank. These neobanks try to redesign and rebuild the banking experience from the ground up to ensure a fit for market in the future.

Conclusion

The financial services industry is currently facing an innovation boom with many start-ups trying to quench the thirst for the dissatisfying quality of services they are receiving from traditional banks. The hype around technological experimentation in the finance sector is only getting started and soon, we could be seeing even more sophisticated and progressive platforms entering the market.