New report from Innovate Finance and Hogan Lovells reveals key benefits that challenger banks in the UK are bringing to customers, the UK economy and wider society
Leading challenger banks consistently top the Competition and Markets Authority’s (CMA) twice-yearly customer satisfaction surveys
Challenger banks are often better placed to help with wider economic and societal policies including Net Zero, economic growth and SMEs and financial well-being.
London, December 14, 2023 - Innovate Finance, the industry body representing the FinTech community in the UK (including challenger banks), and Hogan Lovells have today launched a new report highlighting the key benefits UK digital challenger banks are bringing to customers, the economy and wider society.
The report “Better banking: How challenger banks support sustainable growth, opportunity, and resilience across Britain” jointly produced by Innovate Finance and Hogan Lovells, also provides recommendations to policymakers and regulators on how to support future development of the sector and boost growth.
Challenger banks have emerged since the global financial crisis partly as a response to customer dissatisfaction with traditional banks, due to, for example, high fees, limited transparency, and lack of personalisation. Leading challenger banks supporting sustainable growth, greater competition and deeper resilience in the UK include Allica, Atom, Clearbank, Monzo, OakNorth, Oxbury, Starling, Tandem and Zopa.
Key findings from the report include:
- Supporting small businesses - Challenger banks provide 55% of all small business lending by banks in the UK (equivalent to £35.5 billion), which exceeded lending by major banks. The SME sector accounts for 99% of all businesses in the UK employing 50% of the private sector.
- Higher interest rates compared to traditional banks - In July 2023, whilst the top five largest high street banks (i.e. HSBC etc.) offered interest rates between 0.9% and 1.75%, challenger banks offered rates of 3.25% or more, with Atom leading the pack by offering 3.95% on easy access accounts. ¹
- Driving growth - Challenger banks offer new high-value jobs in the UK banking industry and FinTech sector, many outside London and the South East.
- Improving customer experience - Challenger banks consistently come out top in customer satisfaction surveys. By January 2022, Starling and Monzo, two digital challenger banks, had already grown their market share to 8% of personal current accounts.
- Supporting net zero - Challenger banks support SMEs and other customers to achieve net zero goals by providing them with accessible, affordable and innovative tools to identify the impact of their carbon footprint, set priorities and access to finance for transition. ²
The report illustrates that while the UK remains an attractive location for FinTech start-ups and challenger banks, further policy and regulatory change is critical to continue to unlock even more benefits for UK businesses and households.
The report calls on policymakers and regulatory bodies to:
- Think Challenger Bank first. Policy makers often go directly to the large established banks to help with wider economic and societal policies, overlooking the digital-first, purpose-led challenger banks that are in many cases better placed to help, including supporting on policies around:
- Net Zero and tackling climate change;
- Economic growth and SMEs; and
- Stronger society: creating opportunity and financial well-being.
- Think smart regulation. Avoid an unnecessarily heavy regulatory burden for challengers which would hold back the benefits that they provide to the economy and society. For example:
- Simplify MREL requirements on challenger banks to enable them to lend to more SMEs.
- Strip out PRA gold plating of Basel and apply a proportionate regime to non-systemic banks.
- Increase bank levy threshold to enable challengers to re-invest more of their profits into growth.
- Apply challenger and competition tests to new regulation to avoid unintended consequences for these banks. For example, new regulations to introduce mandatory reimbursement for fraud risk placing a disproportionate financial liability on home-grown British challenger banks whilst imposing absolutely zero financial liability on the Big Tech platforms, such as Meta, on which most frauds take place.
Janine Hirt, CEO at Innovate Finance, said: “The UK is a world-leader in FinTech, and we are delighted to release this report in partnership with Hogan Lovells to illustrate the success of UK challenger banks. Challenger banks in the UK are able to flourish within a supportive regulatory environment to bring important benefits to customers, the UK economy and wider society. However, more needs to be done to ensure the UK remains this thriving innovation hub. Industry, regulators and policymakers must continue to work together to ensure smart regulation is in place to keep the UK a competitive country for FinTech businesses like neo-banks to start and scale.This report highlights the incredible track record and achievements of our UK challenger banks, which are making financial services more democratic and accessible for all, and outlines the steps which must be taken to continue fostering this positive transformation and unlock even greater benefits”.
Charles Elliott, Counsel at Hogan Lovells, said: “In the dynamic landscape of modern banking, challenger banks are redefining what it means to be customer-centric, powered by cutting-edge digital technology and unencumbered by outdated systems. Their agile, tech-driven business models can adapt to evolving customer needs, and swiftly introduce new and innovative products to serve them. The UK’s regulatory approach has been an important success factor (including the regulatory sandbox). Regulators have encouraged innovation and competition in banking whilst retaining their focus on sound risk management, governance and culture to deliver an operational focus on consumer protection and fairness”.
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Notes to Editors
The full report is available to download here.
Media contact
Seven Hills – innovatefinance@wearesevenhills.com
About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Its mission is to accelerate the UK’s leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
Innovate Finance’s membership ranges from seed stage startups and global financial institutions to investors, professional services firms, and global FinTech hubs. All benefit from Innovate Finance’s unique position as the single point of access to promote enabling policy and regulation, talent and skills, business opportunity and growth, and investment capital.
By bringing together and connecting the most forward-thinking participants in financial services, Innovate Finance is helping create a global financial services sector that is more transparent, more sustainable and more inclusive.
More information at www.innovatefinance.com.
About Hogan Lovells Legal and Consulting Services
The Hogan Lovells Financial Services and FinTech practices are recognised in the market for their specialist knowledge, pragmatism and creativity, combined with a strong awareness of the market and risk, their understanding of the regulatory and business landscape (including funding structures, commercial and corporate transactions) and for their forward-thinking, problem-solving approach. They are also known for having a large and stable team, with lawyers at all levels of seniority.
The practice is global and benefits from collaborating with financial services experts in the EU, US and Asia on emerging trends and on cross-border implementation projects and transactions.
They are market leaders for their Consumer Finance, Payments and FinTech practices as they have continuously been recognised as Band 1 in Chambers UK since 2015. Hogan Lovells was the first UK law firm to establish a practice dedicated to the FinTech sector, drawing on their strength in financial services regulation and technology law and building on their reputation for innovative legal thinking dating back to their ground-breaking work on the establishment of Zopa in 2004. The practice is overseen by a Global Steering Group bringing together partners and associates across the firm to discuss trends and co-ordinate our offering to clients. Their FinTech focus areas include (but are not limited to) banking/institutional infrastructure, collaboration agreements, blockchain and cryptocurrencies, consumer banking, crowdfunding, cybersecurity, insurtech, investment management, open banking, marketplace lending, payment services, regtech, remittances, Robo-advisors, smart contracts, VC, AI, NFT creators and exchanges, and securitisation.
Hogan Lovells Consulting provides innovative and tailored solutions to compliance, risk and operational challenges, with the support of the firm’s market-leading legal practices where required. When regulatory requirements drive changes to business operations, they integrate and leverage technology and data-driven solutions where required. Their clients benefit from a seamless process provided by one firm, which accelerates project delivery and reduces the risk of conflicting third-party advice.
More information on Hogan Lovells Financial Services.
