Challenger banks are small, recently-created retail banks in the United Kingdom that compete directly 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 (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. In order to be defined as a "bank", the company must be authorised to accept retail deposits by the UK financial regulator the Prudential Regulation Authority (PRA).
Prior to changes in the regulatory landscape in the UK financial services industry, setting up a new bank, with a full UK banking license, 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 one to have been issued by the UK government in 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 April 1, 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.
List of challenger banks
This list contains notable companies that have received PRA authorisations to operate as banks in the UK:
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- Zhuplev, Anatoly V., ed. (2018). "Challenger Banks". Disruptive Technologies for Business Development and Strategic Advantage. IGI Global. p. 106. ISBN 9781522541493 – via Google Books.
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- Bowman, Andrew (2014). The End of the Experiment?: From Competition to the Foundational Economy. Manchester University Press. p. 92. ISBN 978-0-7190-9633-4 – via Google Books.
- Moore, James (October 4, 2018). "As watchdogs approve CYBG and Virgin Money's merger, should the big five banks be worried?". The Independent. Retrieved March 12, 2019.
- Flinders, Karl (January 21, 2015). "Six challenger banks using IT to shake up UK retail banking". Computer Weekly. Retrieved March 13, 2019.
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- "A new approach to financial regulation: transferring consumer credit regulation to the Financial Conduct Authority". UK Government. 16 January 2014. Retrieved 19 July 2019.
- Noked, Noam (24 March 2013). "Financial Services Act 2012: A New UK Financial Regulatory Framework". Harvard Law School Forum on Corporate Governance and Financial Regulation. Retrieved 19 July 2019.
- "A review of requirements for firms entering into or expanding in the banking sector: one year on" (PDF). Prudential Regulation Authority. July 2014. Retrieved 19 July 2019.
- English, Simon (March 12, 2019). "Aldermore boss: Challenger banks need stimulus". Evening Standard. Retrieved March 12, 2019.
- O'Hear, Steve (April 6, 2016). "Atom is the first of the new UK challenger banks out the gate — sort of". TechCrunch. Retrieved March 12, 2019.
- Wallop, Harry (February 1, 2010). "First high street bank 100 years, but will Metro Bank get a licence?". The Daily Telegraph. Retrieved March 12, 2019.
- Moskvitch, Katia (February 7, 2019). "Legacy banks are fighting back against the Monzo insurrection". Wired UK. Retrieved March 13, 2019.
- Dillet, Romain (March 16, 2016). "Number26 Grabs $10.6 Million To Bring Its Bank Of The Future To Everyone". TechCrunch. Retrieved March 13, 2019.
- Scuffham, Matt (March 9, 2015). "OakNorth gets banking licence, appoints Adair Turner to board". Reuters. Retrieved March 13, 2019.
- Goff, Sharlene; Arnold, Martin (March 18, 2014). "UK 'challenger' banks plan listings worth £10bn". Financial Times. Retrieved March 12, 2019.
- Williams-Grut, Oscar (December 1, 2015). "Britain just got a new digital bank and it's raising tens of millions of pounds". Business Insider. Retrieved March 13, 2019.
- Collinson, Patrick (June 5, 2018). "Tesco bank customers temporarily shut out from online and mobile services". The Guardian. Retrieved March 13, 2019.
- "CYBG improves bid for Virgin Money". BBC News. June 3, 2018. Retrieved March 13, 2019.
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