Search for growth throws up tough calls for so called ‘challenger’ banks

It seems that whilst many of us were enjoying our summer holidays, a number of so called ‘challenger’ banks were busy planning big strategic moves.

A few days ago, Charter Court announced its intention to float on the London Stock Exchange. Shawbrook is currently delisting from the stock exchange having decided that it could achieve its ambitions more effectively as a private company following a takeover deal with BC Partners and Pollen Street Capital.  And last month, Tandem, a digital challenger bank, accelerated its growth plans by acquiring the banking arm of Harrods.  So what is going on?

Growing pains?

There is no doubt that ‘challenger’ banks are boosting innovation, competition and customer choice in what had become a highly concentrated market – 19 new banking licences have been issued since 2010, with at least eight more pending[1].  

In a market marked by persistently low levels of satisfaction[2], customers are receptive to these new and differentiated offerings. Rather than being tied to a single bank, the survey of 2000 consumers we carried out for our ‘Who are you calling a ‘challenger’?’ report shows that most are comfortable with multiple banking relationships and the opportunity to seek out the best option this brings.  

Willingness to bank with multiple providers in search of the best offer

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The shift to more modular, open banking[3] provides these organisations with further opportunities to embed themselves in the market and reach out to new customers.  However, as these banks grow, they face more complicated strategic dilemmas, for example:   

  1. How to sustain returns as their niche markets become increasingly penetrated.  As one CEO put it, “.. the choice boils down to do we accept growth tailing off and maintain RoE or continue our growth trajectory by moving into new areas that provide lower returns.”.
  1. How long will investors support a standalone strategy? It is no surprise that while these newer banks have ambitious customer acquisition targets, they have low brand awareness – less than 1 in 10 consumers in our survey had heard of any of these institutions.  Inevitably, this means playing the long game on growth unless of course an attractive M&A opportunity arises.

Fulfilling the potential

There are no straightforward or common, solutions to these dilemmas when business models and strategic objectives are so diverse. What’s certain, however, is that these questions are becoming more pressing.

What’s also evident from the organisations we’re working with and current market activity is that acquisition is set to play a key role in creating the critical mass needed to succeed, not just in building scale but also strengthening capabilities and diversifying revenue streams.

In my next blog, I will look at how the market has changed and what else we expect to see happen given the recent boom of M&A activity amongst these so called challenger banks.


[1] PwC analysis

[2] Recommendations from a citizens jury study we carried out on attitudes to financial services included calls for improved customer service and more investment in training (

[3] Catalysts include the second EU Payments Directive (PSD2) and increasing take-up of application programming interfaces (APIs)