Are Challenger Banks Doing Anything Different?

After the last two blogs, various comments highlight other questions, with the commonest one being: will any of these new banks make a profit?

The answer to that is yes. Some already are, such as Shawbrook, OakNorth, Aldermore … the ones you hear less about.

Monzo, Revolut, N26 and others are more sexy because they’re digital-first, young and more noisy. Yet, as this chart from 2019 demonstrates:

Pre-tax losses

A graphic with no description

… they still have a long way to go on loans-to-deposits and reliable income streams, not just interchange fees, to get to being a viable long-term entity and investment.*

The thing for me is that we are asking the wrong questions.

I get asked when they will be profitable? What’s their lending profile? Are they expanding into mortgages and insurance? Are they expanding across Europe? Are they going into the US markets? How do they use technology? Who are their tech providers? Do they use Open Banking? and so forth and so on.

These are interesting questions, but the wrong questions.

I only have one question: are they changing the game?

The question is about their products, services, structures and offers. Are they actually any different to what was there before? Sure, they’re digital-first, come with some extra bells and whistles, provide colourful cards and cool apps, but are the underlying financial products different?

Answer: no.

Where’s the fundamental rethinking of finance with technology in the UK challenger banks? Answer: not much there so far. Just more attractive services, apps, fees and marketing.

This is why I get far more excited when I write about the big Chinese firms offering Alipay and Ant Forest, WeChat Pay and WeBank. The products are fundamentally and completely different. For example, WeBank is basic banking services that costs Tencent less than half a dollar a year to operate. Alipay offers superapps that include investment, savings and insurance products fully integrated in a swipe and transferable between accounts seamlessly.

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