Challenger banks are small, recently created retail banks that compete directly with the longer-established banks in the UK, sometimes by specialising in areas underserved by the "big four" banks (Barclays, HSBC, Lloyds Banking Group, and NatWest Group). As well as new entrants to the market, some challenger banks were created following divestment from larger banking groups (TSB Bank from Lloyds Banking Group) or wind-down of a failed large bank (Virgin Money from Northern Rock).
The banks distinguish themselves from the historic banks by modern financial technology practices, such as online-only operations, that avoid the costs and complexities of traditional banking.
Prior to changes in the regulatory landscape in the UK financial services industry, setting up a new bank, with a full UK banking licence, was extremely expensive and time-consuming. This led to a very small number of banks dominating the UK market—the so-called Big Four—with virtually no competition at all. Indeed, when Metro Bank received their license in 2010, it was the first new high street bank for 100 years.
In the wake of the 2008 financial crisis, it was decided to open the market up to new banks. After a period of consultation, the regulation to enable this formed part of the Financial Services Act 2012, which came into force on 1 April 2013. A summary and assessment from Harvard Law School can be accessed online.
To assist new firms to enter the banking market, the PRA, part of the Bank of England, set up their New Bank Start-up Unit which guides firms through the process from an expression of interest, through the application process, to 'authorisation with restrictions' if appropriate, and finally to those restrictions being lifted and the firm being granted a full banking license.
In July 2014, the PRA, together with their co-regulators, the Financial Conduct Authority published a review of the requirements, one year on.
List of challenger banks
This list contains companies that received authorisation from the PRA to operate as banks in the UK.
|Atom Bank||2015||App-based bank offering savings and mortgages.|
|Monzo||2016||One of the early app-based banks, Monzo had 3.5 million customers as of February, 2020.|
|Metro Bank||2010||The first high street bank to launch in the UK in over 150 years. In 2019 it lost £800m (40%) of its company value as the result of an accounting error in which its commercial loans were misclassified. An investigation by the PRA resulted in the bank being fined £5.38m by the PRA in December 2021. In November 2021, it entered talks with the Carlyle Group concerning a possible takeover bid.|
|N26||2016||A German app-based bank which ceased to do business in the UK in April 2020. The UK's exit from the European Union terminated the ability to "passport" a European banking licence, necessitating applying for a British banking licence to continue which N26 decided would be too complex and expensive.|
|OakNorth Bank||2015||Provides business and property loans to SMEs.|
|Shawbrook Bank||2011||Provides savings, business finance, property finance, personal loans.|
|Starling Bank||2014||Starling Bank was founded by former Allied Irish Banks COO, Anne Boden, in January 2014.|
|Tandem||2015||The former Harrods Bank, founded in 1893, which was acquired in January 2018 by fintech startup Tandem Money and renamed.|
|Tide||2015||A UK financial technology company specialising in accounts for small and medium-sized businesses, offering FSCS protected bank accounts provided by ClearBank.|
|The Bank of London||2020||A universal bank. The second new principal clearing bank set up in over 250 years, it is also the first bank to attain unicorn status upon debut, after achieving a valuation of over $1.1B.|
|Virgin Money||1995||A holding company that owns Clydesdale Bank plc, which in turn trades as Clydesdale Bank, Yorkshire Bank, and Virgin Money. It was originally set up by National Australia Bank (NAB) in February 2016, when it was called CYBG plc.|
- List of authorised UK start-up banks as of 16 February 2021[update], by the Bank of England
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- ^ Dillet, Romain (16 March 2016). "Number26 Grabs $10.6 Million To Bring Its Bank Of The Future To Everyone". TechCrunch. Retrieved 13 March 2019.
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- ^ "CYBG improves bid for Virgin Money". BBC News. 3 June 2018. Retrieved 13 March 2019.