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Beyond the Hype – Insight into Digital Challenger Banks

The concept of the digital-only bank has become a global phenomenon present in all major regions around the world. In the last two years alone, many digital challenger banks have witnessed rapid growth in customer numbers, and COVID-19 has accelerated this trend in some instances. However, while they are much more prevalent globally, digital challenger banks have broken out more easily in some areas than in others. Other markets such as the UK and Europe have proved easy for startup banks and third-party tech providers to enter but difficult to sustain. This has culminated in creating a mature market of hundreds of small players, producing increasingly specialist banks to solve particular needs that will struggle to achieve success over the longer term.

This insight into digital challenger banks report covers recent market history, regulatory changes, conduciveness for challengers to operate, as well as insights from our 2020 Banking and Payments Survey examining changing consumer attitudes to digital-only banks.

What are the market dynamics for digital challenger banks?

Digital challengers have broadly tried to grow in two ways. The first is via rapidly growing customer numbers to take advantage of economies of scale, while the other concentrates on creating a full suite of banking products as well as maximizing the deposit and lending potential of customers. After years of operations, the majority of digital challengers are not generating enough revenue to be sustainable, with some lacking the product suite to allow that to happen. Profitability will become an issue for even the most successful challengers within the next five years. The marketplace model has mostly been used as a tool with which to attract and retain customers. It is therefore unknown how valuable a banking marketplace is as the underlying value is hidden. Social media also helps players engage on an emotional level with customers as they become familiar with the brand, message, and usefulness of the proposition.

What is the regional outlook of digital challenger banks?

The key regions for digital banks are the UK, the EEA, Australia, and Asia.

The UK

The market has become increasingly concentrated over the last few decades, with several banks facing bankruptcy or being acquired by larger entities, particularly after the global financial crisis. This event also caused incumbent banks to refrain from lending to smaller businesses, as they were seen as too risky to bother with, creating a gap in the market for both challenger and non-bank lenders. Additionally, new rules on compliance and security have made simple banking tasks more difficult, both for banks and customers. Since the launch of open banking in August 2016, new challengers have steadily trickled into the market. Today, the UK has hundreds of banking players, with new, specialist firms launching almost every week.

The EEA

The EEA is a large collection of partially integrated banking markets, with a tradition of smaller regional banks, cooperatives, and credit unions in many European countries, including Germany, Norway, and Italy. However, running a conventional balance sheet bank in the EEA has proved increasingly difficult since the global financial crisis. Consequently, consumers have faced costs for basic banking services in the form of account charges or negative rates on deposits, as well as difficulties when trying to borrow money. Hence,

respondents in European countries were generally quite positive about the prospect of digital-only banks. Challengers that have been successful in the EEA market have typically first delivered consumers value in the payments market, offering a cheaper, easier way of changing currencies as well as sending remittances. 

Australia

Some of the newest operational challenger banks are in Australia. Banking there is heavily regulated in favor of the big four, namely CommBank, Westpac, ANZ, and National Australia Bank.  The Consumer Data Rights (open banking) regulations which are designed to force banks to share their data with trusted third parties, were held back in Australia for several years under the guise of data protection, only coming into force in January 2019.

Asia

The region is less enthusiastic about digital-only bank disruption from regulators compared to other regions. Consequently, in areas where digital banks have been set up, most are less than a year old. The general trend in Asia appears to be large business consortiums forming challenger banks rather than small startups. This could provide several advantages over Western challengers, such as having the capital to develop a full product set from scratch, not having to deal with short-term investor sentiment, and being able to shoulder losses for considerably longer. On the other hand, digital challengers in Asia are likely to have to work even harder than in the West to offer an innovative and appealing proposition.

Digital challenger banks, by key regions

Digital challenger banks, by key regions

For more regional insights, download a free report sample

Who are the key digital challenger banks?

Some of the key digital challenger banks are 86 400, Xinja, Up, Monzo, Starling, Tandem, Nubank, Chime, KakaoBank, Revolut, and N26.

Key digital challenger banks

Key digital challenger banks

To know more about key digital challenger banks, download a free report sample

Market report scope

Key regions The UK, EEA, Australia, and Asia
Key digital challenger

banks

86 400, Xinja, Up, Monzo, Starling, Tandem, Nubank, Chime, KakaoBank, Revolut, and N26

Reasons to buy

  • Gain insight into the strategies digital challenger banks are trying in each market, with their associated strengths and weaknesses.
  • Learn about threats to incumbents and newer digital challengers, as well as potential opportunities for acquisitions and partnerships.
  • Compare the performance and strategic direction of your firm against competitors.

Reasons to Buy

  • Gain insight into the strategies digital challenger banks are trying in each market, with their associated strengths and weaknesses.
  • Learn about threats to incumbents and newer digital challengers, as well as potential opportunities for acquisitions and partnerships.
  • Compare the performance and strategic direction of your firm against competitors.

Key Players

Bendigo and Adelaide Bank

86 400

Xinja

Up

Atom Bank

Metro Bank

Monzo

Starling

Tandem

Nubank

Chime

KakaoTalk

KakaoBank

Cuscal

Ferocia

Revolut

N26

Table of Contents

Table of Contents

1. Executive Summary

1.1. Overview

1.2. Key findings

1.3. Critical success factors

1.4. Competitor overview

2. The Global Digital Challenger Bank Market

2.1. The UK market

2.2. Monzo

2.3. Tandem

2.4. Starling Bank

2.5. The EEA market

2.6. Revolut

2.7. N26

2.8. The Australian market

2.9. Up

2.10. 86 400

2.11. Xinja

2.12. The Americas market

2.13. Chime

2.14. Nubank

2.15. Asia

2.16. KakaoBank

3. Appendix

3.1. Abbreviations and acronyms

3.2. Methodology

3.3. Secondary sources

3.4. Further reading

List of Figures

List of Figures

Figure 1: UK attitudes towards digital-only banks remain positive but skeptical

Figure 2: Monzo uses every opportunity to showcase how it is both different and better for customers than its competition

Figure 3: European attitudes towards digital-only banks compare similarly to consumers globally, with attitudes steadily becoming more positive

Figure 4: Revolut offers a significant number of subscription benefits at competitive prices, but includes many of the best features as part of its free product

Figure 5: Although attitudes towards digital-only banks have improved, Australians remain skeptical of both challengers and incumbents

Figure 6: The Tree of Up engages users not just with the current offering but with the promise of more to come

Figure 7: North and South Americans display similar opinions regarding digital-only banks compared to consumers globally

Figure 8: Asian consumers think highly of digital-only banks, with most respondents considering them better than incumbents on multiple levels

Figure 9: Kakao used the best aspects of its brands when launching its bank

Frequently Asked Questions

The key regions for digital banks are the UK, EEA, Australia, and Asia.

 

 

Some of the key digital challenger banks are 86 400, Xinja, Up, Monzo, Starling, Tandem, Nubank, Chime, KakaoBank, Revolut, and N26.

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