What is a challenger bank – and what’s the best challenger bank for business?

Challenger banks are new UK banks and services designed to disrupt traditional banking groups and the products they offer.

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They usually try to do this by creating new technology, or by developing products and services that traditional banks haven’t considered.

They might also be targeted at a specific audience. Tide, for example, is a mobile-first bank for small and medium-sized businesses.

But while they have in many ways been successful, consumers don’t yet seem ready to ditch the banks they know and love.

Here’s our guide to challenger banks for small businesses – including what to look out for when deciding whether to trust one, and a list of the best challenger banks for small businesses.

What is a challenger bank?

You could define a challenger bank as a bank that’s not part of a ‘big four’ banking group – Barclays, HSBC, Lloyds and the Royal Bank of Scotland.

This means that established high-street banks like Metro Bank and Virgin Money are challenger banks. They differentiate themselves from traditional banks through the way they offer their services. Metro Bank, for example, sets itself apart with branches that open seven days a week, outside of normal working hours.

But more recently, the conversation around challenger banks has shifted to mobile-only and digital-first providers, which give customers more convenient ways of accessing their money.

These banks were established because traditional banks were lagging behind technologically. They usually let you track spending in real-time through a mobile app. Many mobile banks can also integrate with other apps and platforms, like Xero and QuickBooks, to help you get a complete overview of your business’s finances.

As they’re digital-first, you can open an account on your phone in a matter of minutes and your card usually arrives in days. This makes them attractive for businesses that want to get set up quickly, without the need for appointments and meetings in branches.

As a quick overview, here’s a mobile and digital-first UK challenger bank list, so businesses know the apps to watch out for:

• ANNA
• Atom
• Monese
• Monzo
• Revolut
• Starling
• Tide

Why choose a challenger bank?

Challenger bank pros

• poor service from traditional banks – CityAM reported in 2019 that customers are annoyed about how difficult it is to apply for a mortgage, and how banks resolve problems
• better use of technology – traditional banks are playing catch-up with their digital services, and challenger banks built entirely around an app often have more advanced features (for example, budgeting tools and integration with accounting apps)
• speed – as mentioned, you can usually open an account through an app in minutes, with your card arriving in days

Challenger bank cons

• they’re usually new – which means there’s more risk of them shutting down. While your money should be safe if this happens, it can cause more hassle than you need when running a business. As an example, N26 recently shut down in the UK, citing Brexit challenges
• not all of them have a banking license – some digital-first services work as e-money institutions rather than full banks. This means you’ll get a sort code, account number and debit card, which you can load up through an app. They’re still regulated, but you won’t get a full account with facilities like loans and overdrafts – and while your money is protected, it’s not protected to the same extent (more on that below)
• people aren’t ready to ditch traditional banks – in January, the Financial Times questioned how many people really are ‘banking’ with the digital-first startups, pointing out Monzo’s exclusive customer base is only 20 per cent. This suggests that you might only consider using a challenger bank alongside a traditional account

Are challenger banks safe?

Trust in some challenger banks has been shaken by controversies.

Metro Bank faced trouble in 2019 over an accounting error. It had to reassure customers that there was no need to withdraw cash.

And in 2020, Wirecard collapsed in the midst of fraud allegations. Wirecard was a German electronic payments provider, with a UK arm called Wirecard Card Solutions.

Some mobile-only banks that don’t have banking licenses themselves use payment providers like Wirecard UK, giving customers debit cards that they can load money onto.

When Wirecard’s parent company collapsed, the FCA suspended Wirecard UK’s ‘regulated activities’ to make sure customers’ money was safe, which left some unable to make payments.

The FCA eventually lifted restrictions, letting customers use their money. While many digital banks are switching away from Wirecard, the episode highlighted some of the negatives of using mobile-first banks.

The big one is that if a challenger bank doesn’t have a banking license, your money (up to £85,000) isn’t covered by the Financial Services Compensation Scheme (FSCS).

That’s not to say it isn’t protected. If a bank doesn’t have a banking licence, they have to separate your money so they can’t use it to clear their own debts if things go wrong.

But if you want an extra level of trust, be sure to look out for banks that have a banking license and FSCS protection.

Best challenger bank for small businesses

What’s the best challenger bank for business? Here’s our roundup of some of the best options, in no particular order. Be sure to research your options carefully and choose one that suits your business needs best.

Tide

Tide is a dedicated business banking app for freelancers, sole traders, limited companies and growing businesses.

As an e-money firm, it doesn’t have a banking license, but it protects your money in a separate account. Plus, Tide has started to offer current accounts through ClearBank. In one of those accounts, your money will be covered by the FSCS.

You can create invoices through the app, as well as sub-accounts if you want to have different money pots (like for your taxes or for marketing).

It also integrates with other software like Xero and QuickBooks and you can use it on a laptop or desktop.

It’s free, but there’s a bank transfer fee of 20p, as well as a £1 charge for cash withdrawals and cash deposits.

Tide also offers paid plans if you want to unlock more features:

• the Plus plan is £9.99 a month and gives you priority support as well as a 24/7 legal helpline
• the Premium plan is £49.99 a month and gives you everything the other plans offer, as well as a dedicated account manager and a £1,000 flexible balance

Starling Bank

Starling Bank is a fully licensed bank rather than an e-money provider, which means your money is protected up to £85,000 by the FSCS.

It offers both personal accounts and current accounts, as well as business lending facilities (both overdrafts and loans).

If you’re a freelancer or sole trader, you need an existing Starling personal current account to apply for its sole trader account. If you’re a limited company, you can apply for its business account without needing an existing account.

As with other apps, you can integrate Starling with your accounting software. And it has a ‘business marketplace’, where you can download other apps and connect them with your Starling app.

Starling has also launched a feature called business toolkit to take care of admin like invoicing and expenses. A useful feature for sole traders is a real-time estimate of the money you need to keep aside for your Self Assessment tax bill.

Starling is free, with a £3 charge for cash deposits at the Post Office, up to £1,000. Anything over is charged at 0.3 per cent.

The business toolkit feature costs £7 a month.

Monzo

Monzo is one of the most well-known mobile banks, and they’ve now launched a business account.

As with Starling, Monzo is a proper bank. Your money is protected up to £85,000 by the FSCS.

Monzo offers everything you’ve come to expect from a mobile bank. The Pro option costs £5 a month, but businesses get access to features like a pot to set aside a percentage for tax each time you’re paid, integrated accounting (with Xero, QuickBooks and FreeAgent), and automatic invoicing.

Through Monzo, new users of Xero can access the accounting platform for free for six months.

Monzo’s Lite option is free, but it has a far more limited set of features for businesses.

Monzo also has a list of businesses they can't service right now, so be sure to check whether you're eligible first.

Mettle

Natwest launched Mettle in 2019 as its digital-first product. You don’t need to be a Natwest customer to use Mettle, as it’s run independently.

It’s targeted at smaller businesses – sole traders and limited companies with up to two owners.

Mettle says that it’s bringing new ideas and a fresh approach, “with the security of an established bank”.

But with this in mind, Mettle isn’t a bank – it’s an e-money provider. Your money isn’t FSCS protected, but they do keep it safe in a separate account.

It has invoicing and accounting features, and can integrate with software like Xero and FreeAgent. In fact, you can access FreeAgent for free, as long as you make one transaction a month from your Mettle account.

Mettle is also completely free, for now anyway. They say there are no hidden costs or transaction fees and will give customers plenty of notice if that changes.

ANNA

ANNA stands for ‘absolutely no nonsense admin’ and is another dedicated business banking app. Its gimmick? The app meows when you make a payment – you can decide whether that's a good or a bad thing.

ANNA makes good on what it stands for by creating, sending and chasing invoices through the app.

You can also easily track your expenses – when you make a payment with your debit card, the app prompts you to take a picture of the receipt. It automatically categorises and stores your expenses, meaning you don’t have to worry about losing receipts.

Like Tide, ANNA is an e-money firm, so your money isn’t covered by the FSCS. And as it uses Wirecard, it was hit by the scandal described above. Despite payments being frozen, ANNA did reassure customers that their money was secure.

ANNA is free, with different pricing plans as your business grows. The top-tier pricing plans give you access to different features, like invoices with no ANNA branding:

• free for businesses with a monthly income under £500, with a maximum balance of £5,000
• £4.90 a month for businesses with a monthly income between £500-£2,000, with a maximum balance of £25,000
• £9.90 a month for businesses with a monthly income between £2000-£20,000, with a maximum balance of £120,000
• £19.90 a month for businesses with a monthly income between £20,000-£500,000, with a maximum balance of £700,000

What do you think about using a challenger bank for your business? Let us know in the comments below.