There're no Challenger Banks in the US. Yet.

When speaking about the challenger banks, we often refer to the United Kingdom. Monzo, Starling, Tandem, Atom, Revolut and others - completely digital banks (or nearly similar to them) built on the new technology as opposed to the outdated infrastructure of legacy banks. They usually offer better interest rates, lower or no fees at all, and better overall services. It is important to stress that these challenger banks have an easier time creating a good customer experience since they are not built on the rusty rails of the existing financial system, making the way they operate more efficient and hence the user experience more enjoyable.

Challenger banks have an easier time creating a good customer experience since they are not built on the rusty rails of the existing financial system, making the way they operate more efficient and hence the user experience more enjoyable.

Note: the graph is not up-to-date, and the funding raised has changed since it was published. But the names still remain acute.

But what is a Challenger Bank?

In order to define one, we can take a look at the Oxford Dictionary. It says that a challenger bank is a relatively small retail bank set up with the intention of competing for business with large, long-established national banks.

We must highlight that challenger banks are usually fully licensed as regular banks, but the core difference between them is that they do not have the operational burdens of large banks - most notably extensive and expensive brick-and-mortar branch networks and cumbersome legacy systems. As noted earlier, their approach allows them to offer better services and better customer experience.

Challenger banks do not have the operational burdens of large banks.

Obviously, challenger banks do not have the scale yet (or have not scaled out yet), but they are winning customers steadily and are doing it quite well. Isn't it how massive market disruptions always start?

Moving to the United States

As new entrants have been launched and are working towards disrupting the dominance of Britain's large, traditional banks (posing a threat to such names as HSBC, Lloyd's, Barclay's etc.), the situation across the pond appears to be quite stalemate.

The obvious question here is WHY? Well, there are 2 primary reasons for that.

• First, it is far more difficult to get a charter in the US than it is to get the equivalent banking license in the UK. This is basically why some US digital banks (for instance, Simple and Moven) have partnered with the existing institutions to avoid the need to get their own charters.
• Second, it is much harder for startups to attract the necessary investments in order to get off the ground without these charters. And this is quite rational since it would be naive to think that investors would pour their money into start-ups/challenger banks based only on their "disruptive ideas", without the real potential to take off and challenge the banks.

Speaking about the charters, we can note that they are indeed very complicated and expensive. In order to get a US charter, new banks must get an approval from a national regulator such as the Office of the Controller of the Currency (OCC) (this bureau serves to charter, regulate and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United states) or a state regulator, along with deposit insurance from the Federal Deposit Insurance Corporation (FDIC) (this entity basically controls the deposits and their insurance in banks and thrift institutions), which requires approval and significant resources.

In contrast, in the United Kingdom, the authority that licenses banks exists completely within the Financial Conduct Authority (FCA), and deposit insurance requirements are lower for startups as long as they do not take on too many customers. Therefore, digital and challenger banks in the UK can have their own licenses and avoid depending on a partner because the license means that the bank can control the entirety of its service.

To conclude, we can fairly say that FinTech regulators in the United States have been extremely restrictive thus far, while those in Europe have proven successful and hence allowed the region to become a hub of financial technology innovation. Challenger banks will eventually come to the US as well - either from Europe, or will be launched domestically. Therefore, regulators need to rethink the established framework and laws which prevent innovation, competition, and in turn better services in the financial sector.