Sometimes called neobanks, challenger banks have no brick-and-mortar branches or physical locations. They are entirely digital, and some might technically not even be banks at all. The services offered by challenger banks are typically available through mobile apps or websites and might include the ability to transfer money between accounts, set spending limits and savings goals, and make purchases using a debit card.
Challenger banks compete directly with more traditional and established banks and financial institutions. Since they do not have to pay rent on physical locations or hire people to work at those locations, they can often give their customers better rates and can charge lower fees on services.User experience (UX) is usually the focus of challenger banks. Neobanks want their customers to have an enjoyable experience onboarding and to enjoy using their apps or websites, all while helping people build better money habits.
If you’re interested in building your own challenger bank or would like to create an app for use by challenger banks, here’s what you need to know about this novel form of banking.
How Do Challenger Banks Make Money?
Traditional banks make money from the interest they charge on loans. They get the money they need to provide the principal on those loans by encouraging people to deposit their cash into savings accounts and checking accounts. To make the idea of opening savings accounts appealing, many banks offer to pay the account holder, also in the form of interest. Banks often incentivize checking accounts, which usually do not earn a large amount of interest, by making them available for free, or by offering free perks, such as direct deposit, or debit cards.
Challenger banks haven’t just introduced a new way of banking, they also introduced new ways for banks to make money. Since many neobanks don’t offer loans, they can’t earn money on interest payments like traditional financial institutions. Some of the money-making features of challenger banks include:
- Collecting interchange fees: Most neobanks issue debit cards to users, which they can use to make purchases or get cash from ATMs. It’s through those cards that challenger banks can make a considerable amount of money. Every time a person uses a debit card, the merchant’s bank pays a small fee to the card-issuing bank (1%-2%). The fee is usually a small fraction of the total transaction amount, but those small amounts add up, especially when tens of thousands of people are using a neobank’s debit card to pay for purchases.
- Offering subscription plans: Some challenger banks have gotten creative when it comes to ways to make money. A few have started to offer subscription-based services or tiered levels of services. Paying a monthly fee gives a user access to perks they wouldn’t get with a free account, such as overseas insurance coverage and fee-free ATM withdrawals.
- Collecting tips for overdraft coverage: Traditional banks often charge customers who overdraw their accounts, either in the form of a flat fee, or a percentage of the overdrawn amount. Some challenger banks have put a creative spin on overdraft coverage. If a customer makes a purchase that causes them to overdraw their account, the bank won’t deny the charge. They’ll cover the overdraft amount and ask that the user tip for the service if they would like, once their balance is back in the black.
Top Challenger Banks
In recent years, as a result of changing regulations and shifts in consumer demand, many challenger banks have arrived on the scene. While the list of neobanks is always growing, here are some of the most notable competitors:
- Simple: Simple is a neobank that also offers users money management tools. When a person deposits money into their Simple account, they have the option of divvying it up based on how they’d like to spend or save it. The bank is one of the few challenger banks to offer personal loans in addition to checking and savings accounts, because they are owned by a larger full-service bank, BBVA.
- N26: N26 was created in Europe and recently became available in the U.S. You can open an N26 account in minutes directly from your phone. Once the account is open, there are no fees for any of the services. One way that N26 is standing out from other neobanks is by offering debit card users perks, such as cashback on purchases from certain merchants, or exclusive discounts.
- Monzo: Like N26, Monzo comes from Europe and has only recently begun making inroads in the U.S. The challenger bank offers users money management tools and the option of rounding up purchases and sending the spare change to a savings account. Monzo doesn’t charge fees.
- Revolut: Revolut is a challenger bank that has embraced the use of tiered service. A free, standard plan with the bank lets users exchange currencies, withdraw up to $300 per month from an ATM, and invest in cryptocurrency. People who purchase the premium plan can withdraw up to $600 per month fee-free, use virtual card numbers, and enjoy free overseas medical insurance.
- Chime: Chime has several features designed to help users get a better grasp on their finances. It offers fee-free overdraft protection with optional tipping, a credit-builder secured credit card, and an automatic savings plan.
Are Challenger Banks Safe?
Challenger banks often partner with larger, more traditional banks to provide their customers with the financial protections associated with having a checking or savings account. This is done by using Banking as a Service infrastructure, allowing the challenger bank to rent out the banking license and security features of an established bank. These partnerships allow neobanks to offer their customers deposit insurance protection from the Federal Deposit Insurance Corporation (FDIC). FDIC protection means that a customer won’t lose their deposit, even if the challenger bank itself has financial difficulties.
On the security side of things, many challenger banks include features designed to keep your private information private. Some apps use fingerprint scanning instead of passwords to log in, or require two-factor authentication. Other common security features include:
- Real-time alerts
- The option of locking or freezing a debit card if it’s missing or stolen
- Zero dollar liability for unauthorized use of a debit card
Build a Challenger Bank App With Hydrogen
The traditional banking model is in the midst of massive disruption. As challenger banks become more and more popular, your financial institution might be interested in offering a similar service. Alternatively, you might already have a neobank app and are looking to add on to the features such as budgeting, investments, and financial planning to remain competitive in an increasingly crowded field.
You don’t have to be a tech expert to create a user-friendly challenger bank app. Hydrogen’s API platform and no-code options simplify the process. You can get an app up and running in minutes or expand on the existing offerings in no time at all. To learn more, sign up and get ready to build today.