New report sheds light on the booming Challenger Bank market

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The challenger bank trend first emerged in Europe and has become increasingly important in all parts of the world. Today challenger banks are growing significantly and attracting a lot of money.

Challenger banks are being created around the world. The Rise of Challenger Banks – Are the Apps Taking Over ?, FT Partners, January 2020

According to the newly released version from FT Partners The Rise of the Challenger Banks: Are the Apps Taking Over? Brazilian Nubank is currently the world’s largest challenger bank with around 15 million users and the best funded challenger bank in the world, having raised $ 906 million.

Founded in 2013, Nubank offers a free MasterCard Platinum credit card that can be managed via a mobile app. Customers can open an account in less than three minutes. The low cost digital structure and advanced credit modeling and decision making of Nubank enable it to offer a lower interest rate than most current bank cards and pass on cost savings to consumers.

Nubank is followed by the US Chime (US), the second most financed challenger bank in the world (805 million US dollars), the German N26 (683 million US dollars) and the British Monzo (413 million US dollars).

12 Challenger Banks have raised equity funding of $ 100 million or more, and 6 of them are worth $ 1 billion or more.  The Rise of Challenger Banks - Are the Apps Taking Over ?, FT Partners, January 2020

12 Challenger Banks have raised equity financing of $ 100 million or more, and 6 of them are worth $ 1 billion or more. The Rise of Challenger Banks: Are the Apps Taking Over ?, FT Partners, January 2020

In terms of user numbers, South Korean KakaoBank ranks second with 10 million accounts, followed by Chime (6.5 million) and the UK’s Revolut (6 million).

Challenger Bank User Count, The Rise of Challenger Banks - Taking Over the Apps ?, FT Partners, January 2020

Challenger Bank User Count, The Rise of Challenger Banks – Are the Apps Taking Over ?, FT Partners, January 2020

The rise of the challenger banks

Challenger banks emerged in Europe as the regulatory landscape evolved to lower the barriers to entry for new players. Regulatory changes, including the UK’s open banking standards and the implementation of PSD2, the second payment services directive, have allowed new fintech companies, including challenger banks, to emerge within the banking ecosystem.

In addition, changing customer expectations and a shift towards digital have fueled the growth of the industry. FT Partners’ report finds that banking activities shifted in 2017 and more than half of Europeans switched to digital banking. Europe’s leading economies, including the UK, Germany and France, led the change.

One of the greatest success stories in Europe is the British Revolut, which is now active in over 30 European countries, Singapore and Australia, and is soon to be introduced in the USA, Japan and Canada.

Revolut Statistics, The Rise of the Challenger Banks - Are the Apps Taking Over ?, FT Partners, January 2020

Revolut Statistics, The Rise of the Challenger Banks – Are the Apps Taking Over ?, FT Partners, January 2020

As of December 2020, Revolut was the third largest challenger bank in the world by search frequency. according to to an investigation by the Amsterdam-based Fintech Consultancy Group (Fincog) after Nubank and the French company Nickel.

Top 15 Challenger Banks Worldwide by Search Frequency, Fincog, January 2020

Top 15 Challenger Banks Worldwide by Search Frequency, Fincog, January 2020

Opportunities in emerging markets

FT Partners’ report points to the opportunity for challenger banks in emerging markets, given their large unsbanked populations, high cellular penetration, and growing middle class.

The example of Malaysia’s BigPay is cited, which was started in 2018 to offer users in Southeast Asia an alternative to their traditional bank. In addition to basic banking services, BigPay has also launched a remittance product and is developing a contextualized credit platform.

BigPay is the largest and fastest growing play-challenger-only bank in the region, the report said.

Several challenger banks have also sprung up in Brazil. Aside from Brazil’s top challenger bank, Nubank, there are others including Banco Neon, a mobile bank that offers Visa debit cards and no monthly fees, plus personal loans, investment options, and expense management tools, as well as Banco Original, previously known as Banco JBS , which officially launched its digital retail banking platform in 2016.

Banks are launching their own fintech brands

Some traditional financial institutions have responded and created their own fintech brands.

In the midst of competition from the first online challenger banks, NetBank and Telebanc, ING launched the branchless brand ING Direct and Bank One, WingSpan Bank, in the late 1990s and early 2000s.

In 2009, GMAC transformed its banking subsidiary into a pure online Ally Bank, making it one of the first of the new generation of challenger banks. Most recently, Goldman Sachs launched Marcus as a separate brand offering online loans and savings accounts. Since 2013, SunTrust has offered credit through its online consumer credit division, LightStream.

Top 15 Challenger Banks Worldwide by Search Frequency, Fincog, January 2020

Top 15 Challenger Banks Worldwide by Search Frequency, Fincog, January 2020

However, other established companies have chosen to work with challenger banks. Toronto-based TD Bank has developed relationships with Moven, an early player in challenger banking. Moven was founded in 2010 by Brett King and provides mobile banking services for financial wellness direct to the consumer. The company was launched in 2016 by Moven Enterprise, which is licensing its proprietary technology to banks.

Moven Enterprise’s best-known deployments and customers include TD MySpend, an app that allows users to track their expenses started by TD Bank in 2016, and Yandex.Money, a Russian e-wallet provider with over 45 million users. Moven has hired companies to help clients provide personalized and contextual advice.

Potential future market participants

However, competition in challenger banking will intensify as new and potential future entrants enter the market, the report said.

These potential competitors include technology giants Amazon, Apple, Facebook and Google. Amazon does offers a range of financial products and has been reported to have been in discussions with several banks, including JP Morgan Chase, about offering a current account product.

Apple is active in mobile payments and has recently started partner with Goldman Sachs and MasterCard to offer the Apple Card, a digital and physical credit card.

Facebook operates the Facebook Pay payment platform and leads the Libra Stablecoin Project and Google was supposedly looking offer personal checking accounts via Google Pay.

Other potential competitors, according to the report, include robo-advisors Betterment and stock investment platform Robinhood, both of which recently opened their respective checking and savings accounts, and Uber, the announced the creation of a new department called Uber Money last year.

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