The Growing Pains of the UK’s Challenger Banks

Thu 7th April 2016

The UK’s big banks have had a tough start to the year, with fears relating to global economic slowdown, the impact of the huge fines imposed by the FCA and the threat of more big regulatory changes all taking their toll.  Few if any of these factors, however, are affecting the performance of the UK’s so-called ‘challenger banks’. These young, new lenders operate fleet-of-foot, unencumbered by the legacy systems and entangled processes that have long-hampered the bigger players. Innovation is key to their success; each has a different view of the world and all are intent on delivering a customer service experience which is both fresh and carefully differentiated in the marketplace.

They are certainly causing a stir. 2015 saw Aldermore and Shawbrook float and the FCA give the green light for a number of new lenders to launch, including Atom Bank and Tandem Bank.  Small, highly specialist banks that focus on particular vertical industries are performing healthily  and most recently, Virgin Money posted record profits.  But as ‘the challengers’ continue to grow they now face a challenge themselves – that of growing up. This means dedicating resources and scaling their operations to accommodate more customers, more accounts and more products - all of which lead to major hikes in servicing requirements. On top of this, just like the bigger high street lenders, they too must apply the same rigorous discipline to their own systems and processes as demanded by the ever-watchful FCA. All of which begs a question: How can they avoid getting bogged down in operations and processes? What can they do to protect their agility, which has been such a defining characteristic of the sector?