From the throes of the financial crisis back in 2008, challenger banks burst onto the scene seeking to shake up the market. Over the last 15 years or so, we have seen new players become established institutions in the UK banking space - such as Monzo and Starling – and other players aiming to follow suit. Businesses who adopt a digital-first philosophy deliver much needed agility and innovation to the markets in which they operate, and the banking sector is a prime example of this, which is one of the reasons why challenger banks have been as successful as they have been.

While the last few years has been characterised by a challenging and volatile economic environment, the outlook for challenger banks I believe, will remain positive as we look ahead to the rest of 2024.

Challenger banks continue to fuel innovation

We are seeing more new entrants to the challenger banking scene pop up who are carving out a certain niche, whether its focusing on the SME market, or green finance. Monument, for instance, was created to meet the unmet demands of the mass affluent community in the UK – the doctors, lawyers, property investors, and more – who found themselves stuck between private banks where they couldn’t meet their minimum requirements, and the premier offering of high street banks which simply didn’t serve them adequately. By our estimations, there are around 7.6 million mass affluent people in the UK who have been underserved by the banking community, until now.

As open banking’s popularity continues to grow in the UK, there is great potential to revolutionise how the sector serves customers with increasingly complex needs. Adoption of open banking is on the rise, with the number of active open banking users in the UK reaching eight million users in November 2023, and over one in nine (11%) British consumers becoming active users.

Compared to traditional banks with historic systems, challenger banks with a digital-first philosophy have been able to revolutionise the banking experience. Again, Monzo and their Monzo Plus offering is a clear example of how tech, and open banking, can be used to revolutionise the customer experience. At Monument, our modern cloud and microservices technology enables a plug-and-play approach to new tech innovations as they are developed and as our client needs evolve.

Challenger banks face challenging investment environment

Challenger banks have historically been met with significant investment, and according to Beauhurst, since 2011, high growth UK challenger banks have received 279 equity deals, amounting to £5.96 billion in total investment. What’s more, in 2023 alone, there were 33 deals worth £474m.

While that’s an impressive number, it’s safe to say the funding landscape over the last few years has been a particularly difficult environment, as the economic downturn dampened investor sentiment globally, particularly in early-stage companies. While the fundraising landscape has been very challenging, it was a proud moment last year to close our successful Series B funding round, raising over $50million and raising over £100 million in equity capital since our inception.

Looking ahead, we will undoubtedly see new players with truly innovative propositions secure investment and can scale and increase their share in the market in time. We can also expect challenger banks, to focus on enhancing their open banking capabilities to better serve clients.

Banking players will also keep a particular focus on the adoption of enhanced AI and machine learning to streamline their operations. The possibilities – and benefits – are wide ranging from being able to create more customised products and services to robust fraud prevention measures and being able to deliver enhanced customer service, to name a few.

We can also expect to see more players who still operate with historic and outdated technological infrastructure migrate to the cloud, to unlock the capabilities this offers.

Overall, many players, particularly longstanding incumbents, will now be feeling a sense of urgency to evolve their infrastructure to keep up with the sheer pace of technological innovation we’re seeing in the sector, driven by the innovative and tenacious challenger banking players. Ultimately this is helping to upskill the sector as a whole, improving the quality and breadth of service for consumers which is the ultimate goal.