Accounts with so-called “challenger banks” are becoming increasingly popular as a way to procure the best rates, as savers strive to get higher returns in a continued low interest rate environment. But what exactly are challenger banks, what should you be aware of before banking with them, and are there any catches to choosing these niche names in banking?
What Are Challenger Banks
The term “challenger banks” is one that is applied to any less mainstream bank in the UK market that is “challenging” the bigger banks by offering competitive products, most notably savings accounts and bonds. Often, these are simply smaller and therefore more obscure banks that have few high street branches or operate entirely online. However, these may also be foreign banks that have limited, less well-known operations in the UK or large organisations that are well-known for something other than banking but also offer a small selection of financial products.
Why are People Choosing Challenger Banks?
The simplest yet most important answer to that question is this: to get more interest. A lot of savers have refused to take the recent low interest rates sitting down, and after six years of a record low base rate and accordingly disappointing savings products more and more people are going the extra mile to get the best deal they can. This means looking at the full market, including more obscure providers who they would have previously overlooked in favour of more familiar names. What’s more, it is now very often these challenger banks that do offer the best rates, and naturally this is leading a lot of new customers to choose them after a thorough look over the market.
Are There Any Disadvantages?
There are likely to be some disadvantages if you prefer to bank the old-fashioned way in a branch rather than online or over the phone, as challenger banks have few or no actual branches. Many, especially those that offer current accounts, mitigate this by allowing you to make deposits and the like through any branch of a nominated major banking chain. Others require you to manage your account entirely online. For many, this will be no problem at all, but for some this may be something of a disappointment.
Is Your Money Safe?
Another thing that worries a lot of people when considering challenger banks is whether it is safe to entrust their savings to a small company they may never have heard of before. However, these fears are likely to be unfounded. Challenger banks will handle and manage your money in much the same way as their larger counterparts, and they will still be covered by the Financial Services Compensation Scheme (FSCS) in case anything does go wrong. There are technically a couple of exceptions – some of the foreign banks with limited UK operations such as Dutch firm Triodos or German bank Fidor – but these offer very similar protection under the equivalent schemes in their home countries so there is little practical difference.