Innovation has long been a necessity in the banking sector.

Metro Bank made its debut in 2010, marking the first new high street bank in the UK in over a century. Its grand entrance was characterized by a strategic location in central London and extended hours. However, it fundamentally functioned as just another high street banking option.

The real transformation began in 2014 with the arrival of Atom Bank, the UK’s first fully digital banking entity. This was quickly followed by other digital-first banks like Monzo, Starling Bank, and Revolut (though Revolut only received its banking license in July and is not yet functioning fully as a bank).

This ushered in the age of challenger banks, where consumers could manage their finances primarily online or via mobile applications instead of visiting physical branches.

They gained momentum swiftly. Unlike the larger, established banks that struggled with outdated websites and cumbersome account openings—especially prior to the implementation of the Current Account Switch Service—signing up with a digital bank was a straightforward process.

According to Starling’s website, you could apply for a bank account in mere minutes.

Suits Me, another app-centric debit card provider, promotes its seamless sign-up process by stating, “No verified proof of address needed. No photo ID needed. No credit checks.”

The apps offered by challenger banks were aesthetically pleasing and user-friendly, providing budgeting tools and instant notifications regarding expenditures and savings. Additionally, they presented some of the most attractive rates available for foreign exchange, cashback rewards, and savings.

For instance, back in 2017, Atom Bank drew in nearly 5,000 new customers within a single day as savers clamored for its leading one-year fixed-rate bond.

Chase and Starling’s debit cards gained popularity among travelers due to the elimination of fees for overseas purchases and withdrawals, while Revolut’s prepaid travel card offered competitive exchange rates, rivaling interbank rates.

Monzo’s vibrant coral card even reached a status symbol among its users.

However, underlying issues lingered. Traditional banks often complained about the burdensome regulations they faced compared to the newer entrants, which they argued could lead to challenges in preventing financial crimes.

Recently, Starling Bank faced criticism after being fined £29 million by the Financial Conduct Authority for having grossly inadequate controls over financial crimes. The regulator stated that the bank’s measures failed to keep pace with its rapid growth, increasing from its inaugural account in July 2016 to 3.6 million customers by 2023. They pointed out that the bank did not adequately develop or maintain the necessary systems to combat financial crime risks.

This situation has been developing for some time. Data from the Payment Systems Regulator indicates that smaller banks and payment providers are disproportionately targeted in Authorised Push Payment (APP) scams, which account for approximately 40 percent of all fraudulent activity.

As of 2023, small banks represented 38 percent of the total value lost to APP scams, despite handling only 17 percent of the consumer money transmitted through the Faster Payments system, a commonly used bank transfer method.

Last year, TSB reimbursed 88 percent of fraud losses, Barclays settled 72 percent, and Lloyds returned 55 percent of stolen funds, whereas Monzo only managed to refund 17 percent.

Starling, however, claims it maintains high levels of customer satisfaction and asserts that its innovations have been replicated by traditional banks.

Yet now, the gap in innovation is narrowing as legacy banks enhance their offerings. The competitive landscape prompted traditional banks to adapt and improve as they embraced successful strategies from challenger banks.

For example, Santander’s app now includes a money management feature to help users oversee their spending, along with cashback benefits on bills and a connected six percent easy access savings account. First Direct has optimized customer service to the point of answering calls within minutes, and larger banking institutions frequently provide lucrative cash incentives for new customers—a tactic that challenger banks often cannot match.

Amid this, the rigorous scrutiny that traditional banks face from regulators remains unchanged, combining innovative approaches with the reliability of established institutions.

For managing my finances, I prioritize stability and security over the allure of a trendy bank card any day.