IONA BAIN

This autumn has seen a flurry of activity from so-called “challenger” banks, who are attempting to shake up the financial mainstream and transform the way we manage our money.

The Prudential Regulatory Authority (PRA) relaxed rules in 2013 to allow new banks to challenge the old banking order and inject much-needed competition into the sector. Since then, 15 firms have received the green light. The majority are digital-only brands who are taking advantage of new technology to bypass traditional (and costly) branches in favour of services available purely through smartphones.

These include Tandem, a budgeting & savings app which is currently being tested on 10,000 early adopters. After signing up their existing current account, they will receive tips on how to cut their spending so they can stash cash into a Tandem savings account.

Another entrant to the market - Monzo – is concentrating on developing a current account and payments app within months, having obtained its banking license in August, while Atom Bank launched in October with an app-only service offering some of the best savings accounts out there.

However, these start-ups may have some way to go before they topple Britain’s banking giants. More than 54 million current accounts are shared between the Big Five banks (Barclays, Royal Bank of Scotland, HSBC, Santander and Lloyds), with recent switching statistics showing hardly any meaningful shift towards challenger banks.

According to payments body Bacs, there has been a 3 per cent year-on-year rise in the number of customers switching their current account between January and the end of September. However, Halifax (owned by Lloyds) was the main beneficiary, attracting 47,421 new current account customers with Nationwide gaining 28,253. This was partly in response to Santander announcing that it would slash in-credit interest for its 123 customers in November, though it still reeled in 17,871 current account customers over this period.

Furthermore, research has found that 61 per cent of the public haven’t even heard of digital-only banks. Daoud Fakhri, principal analyst in retail banking at research firm Verdict Financial, said: “The new generation of mobile-only banks will have its work cut out to achieve a viable scale. Only a small minority of consumers strongly agree that these providers will offer better service, rates, or security than they receive from their existing banks, and well over half would prefer to avoid banks that lack a track record or do not have a high street presence.

“Consumers’ primary criteria when selecting banks include whether the organisations have an established reputation and conveniently located branches. This plays right into the hands of traditional banks and leaves the challengers at a disadvantage.”

According to Verdict Financial, more than half of current accounts opened between 2013 and 2016 were still arrange in-branch. Mr Fakhri said: “Our research finds that, if anything, younger consumers are even more dependent upon branches for day-to-day banking than those in older age groups.”

Challenger banks are also struggling to set themselves apart from traditional banks, which have lavished time and investment on updating their services in recent years. Lloyds Banking Group said that 55 per cent of customer needs last year were met through its website and apps, the first time the figure had passed 50pc, and 91 per cent of RBS and Natwest customers have now registered for online banking.

Hannah Maundrell, editor in chief at money.co.uk, admitted that challenger banks weren’t currently making a big difference. She said: “I anticipate we’ll see a small spike in switching during the final months of this year as customers react to banks (including Halifax) slashing rates and rewards on their prized high interest accounts and vote with their feet.”

Sadly, customers looking for a better deal on their current account may find challenger banks wanting. Although they have called on regulators to force the whole banking sector to pay compulsory interest on current accounts, none currently pay switching bonuses or in-credit interest to customers.

The exception is Tesco Bank, which offers 3 per cent on current account balances up to £3,000 (although this is a variable rate and could change at any time). However, around 20,000 customers saw their current accounts hacked last weekend, which won’t be welcome news for a relatively new bank trying to make headway in the current account market.

It closed three branches in May this year as part of its plans to move all personal banking online, but it still only has 137,000 current accounts (less than 1 per cent of the Big Five’s share of the market).

Challenger banks fare much better when it comes to competitive savings rates, according to Rachel Springall, savings expert at Moneyfacts.co.uk.

She added: “Unfortunately, providers are under increasing pressure to reassess their position in the best buy tables to cope with demand, so anyone looking for a good deal should act fast to grab a competitive rate.” She highlighted the loss of 23 best buy deals (including those from Shawbrook Bank and Close Brothers Savings) since the start of October alone.

Ms Springall pointed to Atom Bank as offering the best rate for a one or two year bond at 1.40 per cent and 1.55 per cent respectively, but they can only manage the account via an app.

“As interest rates are predicted to remain low for some time, savers may want to fix for the longer term and if they so wish, Secure Trust Bank are paying a fixed 2.01 per cent over five years and the account can be opened online.”

Alternatively, ICICI Bank UK offers instant access to savings at 1.14 per cent, followed by RCI Bank at 1 per cent.