Over the past decade, there have been a number of banks emerging as alternatives to the incumbent giants. These are commonly referred to as challenger banks. With unique selling point, they aim to grasp a share of the market, but are they succeeding? Patrick Brusnahan reports

Is it accurate to group of these challengers as ‘challenger banks’? A new report (Who are you calling a challenger?) from PwC suggests that this may not be the case due to the wide breadth of these banks’ offerings and varied strategies.

Many actually definite their success not on their ability to challenge or rival high street banks, but to serve their specific markets profitability. This is why many do not particularly focus on current accounts as they recognise customers are willing to multi-bank.

There are at least eight banking licences in the pipeline as of January 2017, PwC actually working with 15 potential entrants, so there are even more possibilities to multi-bank. 54% of customers are prepared to diversify to get the best deals against 30% who would prefer one bank for everything.

As a result, PwC believes that customers will have an increasing variety of products and providers. Sometimes, the actual financial service could be completely in the background as the consumer interacts with companies such as retailers or social networks.

Traditional banks will likely only carry out part of the end-to-end activity. Multiple companies’ systems will be involved in the numerous interactions. This would lead to an incredibly personalised experience.

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New competitors from other industries are getting ready to attract the consumers’ attention and be the preferred interface or first step. Alliances and partnerships will be created to offer a more seamless and attractive proposition. All of these factors will move the UK towards a more diverse and innovative banking market.

There is no such thing as a challenger bank

While many of the smaller banks share common characteristics, to put them all under one label is not beneficial. With their distinctive offerings, they do not need to compete directly and be a ‘challenger’.

In addition, the label which makes them seem like an underdog is simply not correct for what are, in some cases, long-established and significant businesses.

Of the CEOs that PwC surveyed, many did not aspire to replace the main high street banks or even to challenge them. Their main goal was to simply meet customer needs that are not currently well-served.

These needs can be geographic location, client franchise, or product specialism. Specialist lenders in particular want to fill in the gaps left by other banks. As a result, many do not consider current accounts to be critical in their success.

On the other side, customers are not looking for full-service banks, but providers that specialise in specific products.

In January 2017, PwC and YouGov polled over 2,000 British consumers on their awareness and preference for different types of banks, products and services. 54% of respondents said they would prefer multiple providers with the best offering for each product they had.

Not all banks see current accounts the same way and some anchor their propositions around them. For them to succeed, switching rates need to increase. Use of the Current Account Switch Service remains low at 3% and declined by 3% from 2015 to 2016. The six large banking groups account for 89% of the UK current account market.

In addition, of the small percentage of customers that have moved, 85% of them moved to one of the leading high street banking groups.

Regulation has not acted as a deterrent to new entrants in the market. Actually, it has aided them and the market in creating more of a level playing field. To continue this, there needs to be less disparity in capital treatment, more proportionality of regulation, greater levels of independent access to payment systems, and increased transparency of products.

The industry is set to transform into a more diverse model that allows customers to create the exact mix of financial solutions that they desire. ‘Challenger banks’, if that term is to be used, are crucial to this movement.