Challenger Banks – They’re Revolutionising the Banking Industry
The FinTech startup scene has become a catalyst for innovation in the banking sector. This race has been one in which traditional banks seem to be struggling to keep up with. With this said, there have been many partnerships, acquisitions and B2B products connecting the two. Considering the complementary attributes that legacy banks and FinTech startups bring to the table (large customer base, money & brand recognition vs agility, innovativeness & freedom from legacy systems), they make for a rather symbiotic relationship.
Below we have created a brief analysis of Europe’s top 5 FinTech challenger banks. Some of their history and finances are in the first paragraph, following with their offering and general observations. Furthermore, at the bottom of the article there is a challenger bank checkbox which compares each of their offerings.
Starling Bank: 600,000+ Customers
Starling was founded in January 2014 by Anne Boden, who has a rich history in banking. Boden’s original aim was to innovate in the lending space and to become the UK’s biggest lenders with its digital offering. Starling didn’t go down the crowdfunding route, which seems to be a common practice for this new generation of banks. In 2016 Harald Pike, a billionaire hedge fund manager, put down a hefty investment of $70 million into Starling. Pike later made a second investment which resulted in him becoming the majority shareholder. Starling has had a total investment of around $300 million, which includes a £100m grant they received from RBS. Fun fact: this grant was part of a £775m fund by RBS bank, it was a condition set by the UK government for the 45bn bail out during the financial crisis.
Other than the standard challenger bank offering, Starling also offers a business account, lending services, GBP and Euro accounts, teen accounts, fee free withdrawals abroad without limits, interest on your current account balance (0.5% AER on up to 2,000) plus they have their own open API marketplace – this is basically a mini app store of add-ons for Starling’s own app. Third party developers have created a variety of financial products ranging from wealth management to accounting. These last three offerings are what makes Starling stand out from its competitors. However, its accounts are only available in the UK. Starling is also involved in the Banking Services sector, this diversifies their revenue stream as they offer their modern payments system and infrastructure to around 20 institutions, including the UK government.
Despite being one of the older startups, Starling only has around 600,000 customers. This is because they were slow to launch their app (relative to FinTech startup speeds of course). Starling was launched in 2017, which is 3 years after the startup was founded. It’s believed that they had planned to launch at the end of 2015, but the departure of CTO Tom Blomfield and the separation of other team members hit Starling pretty hard. By this time, Blomfields Monzo and some of the other challenger banks had already eaten up some of the market. You can check out some of Starling’s other major moves in one of our previous posts.
Monese: 1m+ Customers
Monese was founded by Norris Koppel in 2013. Koppel, from Lithuania, had the common struggle of opening a UK bank account when first moving to England, this caused hassle in accepting salary payments and paying utility bills. With the motivation to solve this problem he created Monese – so that anyone in Europe can open a UK current account with minimum hassle. In September 2015 Monese was launched, they didn’t go down the crowdfunding route but in January 2017 they raised $10 million in a Series A funding round, then in September 2018 they raised $60 million from their Series B. Monese has had a total investment of $77m, which is the least out of these 5 challenger banks. Monese is different in the sense that it is tailored to those who actually need a UK bank account – not tech savvy millennials who want to benefit from innovative banking features – although they are also welcome.
Monese’s customers get both a UK current account and a European IBAN, which allows for flexibility with salary payments and transfers. Koppel has stated that customers tend to use the Monese banking app as their primary account, accepting their salaries and paying rent through the app – 75% of Monese’s incoming funds are from salary payments. They currently have around 1 million customers, but their target market is different to that of other challenger banks, furthermore, in March 2019 they reported that two thirds of new sign ups weren’t from the UK, but from mainland Europe. It would be interesting to find out what percentage of funds other challenger banks receive from salary payments, this is a stat they haven’t made public… However, Monese seems to offer the least competitive prices. Their free membership requiring a €1 fee per ATM withdrawal and a 2% currency exchange fee. But their cross-border payments system seem to be the simplest to use out of its competitors.
Monzo: 2m+ Customers
Monzo, originally named Mondo, was founded in 2015. This was after CEO Tom Blomfield left Starling Bank, where he was the CTO. He also took 3 other employees with him to venture out on their own. A year later the nimble UK based startup created what was thought to be one of the best crowdfunding campaigns of that time. In March 2016 they managed to secure £1m in under 100 seconds with their campaign on Crowdcube. Monzo has now had a total investment of around $270m, its latest valuation is of over £1bn. However, there are talks of another funding round being closed, which would give it a new valuation of over £2bn…
Monzo has the aim to become the best current account in the world. Monzo is incredibly customer centric, it was lifted off by crowdfunding and the customers have been heavily involved ever since. Their most recent crowdfunding raised £20m in just over 2 days. Their aim of being a friendly FinTech banking alternative is based upon ultimate transparency, the use of a ‘friendly tone’ and customer involvement. They’ve even created a community where a number of ‘Monzo Meetups’ are organised around the UK by enthusiasts of the startup… They have taken customer involvement to a whole new level.
Monzo currently have over 2m customers, with a weekly sign-up rate of 35k. However, their accounts are only available to UK residents, whereas their competitors tend to be available throughout most of Europe. Furthermore, Monzo also seems to offer the least range of products, besides the standard challenger bank offerings of being able to view your finances concisely, splitting bills and fair exchange rates, they haven’t expanded their offering too much. Monzo used to offer fee-free withdrawals abroad without a limit, but as the customer base grew it became unsustainable. Therefore, in Monzo’s typical transparent and customer-centric style, they gave the power to the people and let them decide what it should do. You can check out the decision making process via this link. The community decided that after a €200 limit a 3% charge would be added. Although Monzo doesn’t offer a wide variety of features, it seems that their simplicity, transparency and customer involvement is what gives them their edge.
N26: 2.5m+ Customers
N26 is one of the earlier FinTech Challenger banks, it was founded in February 2013 by Valentin Stalf and long-time friend Maximilian Tayenthal. N26 is a German startup, it has never opted for financing via crowdfunding, but it has had some hefty investments. Their most recent Series D funding round raised $300m in January 2019, giving it a whopping valuation of $2.7 billion. N26 has had a total investment amount of around half a billion dollars, the highest out of its competitors.
N26 has a much more professional feel to it, they haven’t pushed for the ‘friendliness aspect’ in the user interface as much as the other FinTechs have. They have over 2.5 million customers and are active in 24 European markets, with planned expansion into the US. They offer both premium and business accounts, plus their partnership with TransferWise allows for easy/competitive international transfers. However, in the free account there is a flat 1.7% fee for overseas withdrawals. The offering isn’t that expansive, but the professional feel to N26 also adds value.
Revolut: 4m+ Customers
Revolut, the london-based challenger bank, was launched in July 2015. CEO Nikolay Storonsky previously worked in the foreign exchange sector at Credit Suisse. Hence, Revolut had the original motivation of innovating in this sector to minimalize the absurd fees that would tend to be hidden. After a few years of investments both by VC firms and crowdfunding, Revolut has evolved quite a bit. They have over 4 million users, which is the most out of their competitors. As of April 2018 they’re valued at $1.7bn, with a total investment of $336m.
Revolut seem to be the challenger bank that has given the highest prioritisation to the diversification of their offering. Revolut offers: the most competitive currency exchange products (however fee-free withdrawals are limited to 200 a month, then a 2% fee), financial literacy advice, gamification styled cashback perks, both overseas medical and phone insurance, an open banking API that allows for B2B integration, ‘group vaults’ for joint savings and lastly, access to 5 cryptocurrencies on its closed crypto market! The only major aspect they’re missing are loans/overdrafts! Revolut is available all throughout Europe, Australia and soon the US.
Challenger Bank Roundup
So there you have it, a brief summary of Europe’s up-and-coming FinTech challenger banks, each with their slightly different target audiences, aims and offerings. Although Starling appears attractive with its limitless withdrawal fees abroad, plus its interest on account balances, is this model sustainable as their customer base grows to the millions? As Revolut offers such a variety of products and continues to grow, will they become too complicated for the average Joe? Each account can be opened within a few minutes using a smartphone – which one will you choose?
As Promised – The Challenger Bank Checkbox