What does the term ‘challenger’ really mean?

I had a few people haul me up over my critique of Nicholas Megaw’s article in the FT last week, including Nicholas himself. I realised post the post that the issue is definitions. In general, the term challenger banks has become accepted to be used in FinTech circles as banks that are challenging traditional banks with new ways of working. As a result, they have generally been defined in my way:

A challenger bank is a start-up bank that is able to offer a deposit-taking account with a full banking license

Even this narrow definition can be confused. For example, many media refer to challenger banks as firms offering prepaid cards or foreign exchange services. They’re not offering banking at all. Equally, some believe that challenger banks are digital-only banks. That's a definition I find too narrow.

Then there are the branch-based banks that have historically challenged the big banks. In the UK, the big banks are NatWest (RBS), Barclays, HSBC and Lloyds. These banks have had a stranglehold on the core of deposit account markets for decades. Nicholas points out that his use of the term challenger bank was therefore those banks that have historically challenged these four banks, which does includes Santander and Clydesdale-Yorkshire. Nicholas made a comment on LinkedIn as follows:

The earliest reference to one I can find in UK media was talking about HBOS - founded 1695. The first in the FT was Tesco. The term was popularised by Antonio Horta-Osorio and later Ana Botin to refer to Santander’s push to challenge the big four (when Santander UK - despite the age of its Spanish parent - was a new entrant).

I refused to include these, due to my start-up definition usage, but it led me to reflect that we really need a better way to define our terms. In the USA, they refer to the start-up banks as neobanks. Maybe that’s a better term, as at least it is clearly used in the context of digital start-up banks. From Wikipedia:

A neobank is a type of direct bank that is 100% digital and reaches customers on mobile apps and personal computer platforms only. Neobanks do not operate traditional physical branch networks. Neobanks are technology-driven and may adopt machine learning and artificial intelligence technologies whilst not being constrained by legacy systems of traditional banking competitors.

Maybe this is a better term, but here in Britain we use challenger bank in the same way as neobank when, what we mean, is neobank. The real issue at stake here is not the difference between banks that challenge the big four and those that don’t, but more the banks that challenge the big four who are digital first and those that are not.

Monzo, Starling, Tandem, Revolut, N26, Chime and others are all digital-first start-up banks that I have traditionally referred to as challengers, as do most of the media here. These are actually neobanks, a term I dislike, so I would rather call them digital-first banks.

Then there are banks like Santander, Handelsbanken, Clydesdale-Yorkshire, Nationwide and more that are traditional branch-based banks and who have been around for years. Some media, like Nicholas’s article in the FT, refer to these as challenger banks. I find that one hard to swallow, as they haven’t challenged yet, apart from Santander who broke into the UK market from Spain via acquisitions. Equally, they have all been around for decades or centuries, apart from Metro Bank, which is the only one I would slip through that challenger gate.

Therefore, for clarity, I will refer to incumbent banks, digital-first banks (who most call challengers or neobanks, as will I) and branch-first banks (traditionally styled banks that are new to market, such as Santander and the other ones Nicholas cited, who I would never refer to as challengers). If I refer to challenger banks I mean digital-first banks, just for clarity.

Meantime, I owe apologies to Nicholas for attacking his piece, as it is only this terminology that caused the disagreement which was not just with me, btw, but most of my twitterati friends. A branch-first bank is not viewed by anyone in my world as a challenger. The reason? Using a 20th century structure of high cost physical distribution in an analogue business model just doesn’t make sense in a 21st century world of digital distribution, and that last century structure also means you can never challenge the traditional banks.

I hope that clarifies for future usage.

In fact, just to add praise to Richard a little bit, he followed up over the weekend with a column about digital banks that I 100% agreed with and found interesting and useful. Particularly these charts:

Customer deposits

Revenues

Operating expenses

Pre-tax losses

The issue is basically: what is a challenger bank, which everyone is using and defining differently.

Finally on another point, Amin Rasheed Husseini picked up on the fact that I didn’t like two FT columnists disagreeing with each other. My issue is the quality of the columns, the definition of terms and the fact that they are picking on challengers winning or losing this battle, when it’s like the first month of the first year of Game of Thrones. In other words, with eight more years to run, it’s too early to say.