Challenger banks are on the rise, but can they disrupt the big four?

Traditional and well established banks control the majority of the market, but is the sector ready for disruption from challenger banks?

It seems like the theory is sound, as well-entrenched institutions are more often than not wracked with inefficiencies. However, with control of 77 per cent of the personal account market and 85 per cent of small business banking, the established banks won’t go down without a fight.

Barclays, Lloyds, HSBC and RBS are the big four banks that nearly four-fifths of Brits choose to use for their everyday banking. It seems like their grasp on the market is unbreakable, but the rise of smaller innovative solutions, such as online-only banks, could have the potential to shake things up.

It seems that traders, investors, and markets agree too, as the recently successful Aldermore initial public offering (IPO) illustrated.

Aldermore IPO

Shares in Aldermore soared around 12 per cent on its first day of conditional trading, in a flotation that valued the challenger bank at around £650 million, which is a testament to the confidence the market has in the company.

However, it’s not surprising if you look at how the bank has grown since it was founded in 2009.

In a statement last month, the bank noted it had grown from a company with 50 employees and £76 million of lending to a multi-product asset-based lender with 875 employees, 160,000 customers and a whopping £5.6 billion worth of assets.

Phillip Monks, chief executive of Aldermore, said the growth is a reflection of the increasingly open sentiment of businesses and homeowners for using alternative financing options, rather than sticking with traditional high street banks.

Bank in the cloud

A number of challenger banks are looking to move away from the high street and offer their services purely in the online world, some even in the cloud.

CivilisedBank is one such up and coming online-only service that is targeting small and medium-sized enterprises (SMEs) through the use of cloud technology. However, it’s not the only innovative service that is looking to challenge the big four.

A digital-only current account will come from Atom Bank, and a social media and Web 2.0-based banking service comes from Fidor Bank. Hampden is another cloud-based banking platform, and there are a number of others.

Smaller financial institutions are often able to provide faster, more efficient services that are often personalised. However, it remains to be seen whether this edge can really put a dent in the market share of the big four.

Growth of challenger banks

The success of challenger banks hinges on public perception, which is currently firmly focused on the big four. While there are a number of benefits from using these smaller services, there is a degree of economy of scale when going with more traditional banks.

Despite this, challenger banks almost doubled their share of the market over a period of three years. They managed to increase their share of the retail lending market from four per cent in 2010 to seven per cent in 2013, according KPMG’s Warren Mead, head of challenger banking and alternative finance.

These new services still have a way to go before they pose any significant threat. However, if they capture the public’s attention, whilst making the most of new technology, there could be some big changes in the landscape of retail banking over the next few years.