Why we need to define: ‘challenger’ bank

After my recent blog about challenger banks, I received an interesting email from David Parker challenging the idea that a start-up is actually a challenger.

Chris

I continually argue that Revolut is not a challenger bank – it does not today have a banking licence. If you want to say any prepaid card is a challenger bank then there are 200 plus in the UK.

If you want to say any prepaid card that has an IBAN attached to it and offer bank type functionality, then why does everyone ignore the first UK challenger bank, launched in 2005 called APS or recently rebranded to www.splashplastic.com?

To me it is simple to define a challenger bank as a challenger bank. The clue is in the second word – BANK. If you do not hold a banking licence you are not a challenger bank. 

So I asked David to write a more thoughtful article about his views on challenger banks, which he kindly sent to me this week. So, in case you're wondering, this is what a challenger bank really is ...

What is a ‘Challenger Bank’?

On the face of it this seems a very simple question, after all the Oxford dictionary states as a definition:  “A relatively small retail bank set up with the intention of competing for business with large, long-established national banks.”

But it is easy to poke holes in this, as not all challenger banks are retail. Look at Clearbank as an example.  The first UK clearing bank in 250 years, could be described as a challenger bank to the long established national banks.

Market Business News defines them as:  “A challenger bank is a small bank that is threatening the rankings of large banks. The term includes any new or upcoming bank that has recently gained a license. Above all, it is a small bank that is biting at the heels of the ‘big four’ or ‘big five’ banks.”

And the ever present Wikipedia: Challenger banks are small, recently-created retail banks in the United Kingdom that compete with the longer-established banks in the country, sometimes by specialising in areas underserved by the "big four" banks (Barclays, HSBC, Lloyds Banking Group, and Royal Bank of Scotland Group).  As well as new entrants to the market, some challenger banks were created following divestment from larger banking groups  or wind-down of a failed large bank.

All of these definitions have in common one key aspect: the definitions say a challenger bank is ‘a bank’. That is to say they are not an e-money issuer, using Agency Banking to access banking facilities for its customers i.e. IBAN numbers, faster payments, direct debits, standing orders.  They are companies that have received from their regulators a banking licence.  So it seems everything is quite simple: to be a challenger bank you need a banking licence.

But this seems not to be the case. If we look around there are a lot of non-banking companies keen to be described or happy to be called challenger banks.  Is this because investors like the business they are investing in to have that catchy title of ‘Challenger Bank’? Is it because consumers like to be able to say they are using a ‘Challenger Bank’? Or is it just an easy term they understand, for a company offering bank-like services, but not all of them. After all, it is easier than what many in the industry would call a Bank Lite solution.

And even then, if a challenger bank does not have to have a banking license, what makes a business a challenger bank?  Many would argue it is the provision of bank like services, as stated, the most basic of which is an IBAN (in the UK domestic market a sort code and account number) number linked to the card/e-money account.  The issue here is that if we agree to call companies like Revolut a challenger bank, even when they are not a bank, are we not both misleading ourselves and consumers?

And take note that many do call Revolut a challenger bank. Just look at reports by CBInsights, Optima Consultancy for Visa and Sky News  with the headline: “New UK banks challenge dominance of 'big four'  As Revolut becomes the first digital-only bank with "unicorn" status, Ian King explores how they are shaking up the industry”

Further there are many other companies that would be equally worth to be called challenger banks.  IBAN numbers were first attached to prepaid cards in Italy and this quickly moved into the UK.  There are now a whole range of consumer e-money accounts which would consider themselves as offering Lite Banking. For example, here's a list of just a few consumer orientated ones:

• Acorn Account
• Aspire
• Cardone Banking
• Cashplus
• CredEcard Plus
• Icount
• Loot
• Monese
• MoneyMona
• Pockit
• Soldo
• Suits Me Card
• Talk Home
• Think Money
• U Account

... but almost none of these are called by the press or look to call themselves a challenger bank.

We also need to recognise some key differences. Banks take in deposits, pay interest and use the deposited money to carry out other banking activities.  e-money companies cannot do this. The funds are ring fenced and 100% protected, but they cannot pay interest.  This makes everything one could argue much more transparent on where funds are.

Secondly, putting Brexit aside for one minute, you can passport an e-money licence very easily around Europe, allowing you to issue your cards across Europe almost instantly. As a bank, you cannot do this.  You need to set up a whole infrastructure and be locally regulated. e-money is thus relatively quick and easy to launch across Europe.

So who is right?

I would contend that we need to start an industry calling a spade a spade.  That is companies that do not have banking licences are not challenger banks. We should stop referring to them in reports as challenger banks.  The more we perpetuate this mis-description, the more we mislead the general press and thus consumers into thinking that companies that offer bank-like services must be challenger banks.  This denigrates the great Bank Lite solutions that are live in the market today and have no wish to be labelled a challenger bank.