Traditional vs challenger banks: is it time you switched?

18 November 2014

In years gone by, banks were a bit like jobs - people tended to stick with the same one for life. But such loyalty is starting to dwindle as a handful of new kids on the banking block are raising the stakes.

After enduring prolonged periods of poor value and customer service as well as the indignity of being mis-sold inappropriate products, many consumers have been left with a sour taste in their mouths when it comes to their banking experience. None of which has gone unnoticed in recent years as the UK has witnessed a flurry of new challenger banks enter the industry, looking to shake up the established order of the 'Big Four' – namely HSBC, Lloyds, Royal Bank of Scotland and Barclays.

The past year, in particular, has seen a sizeable shift in people's attitude towards their bank accounts. Since the launch of the Current Account Switch Service (which cut the time it takes to move from one bank or building society to another from an average of 18 to 30 days to just seven), well over a million people have taken advantage and moved to a new provider.

While the jury is still out on how much business went to the challengers, looking at the overall number who have voted with their feet, David Mann, head of money at comparison site uSwitch, says: "The fact that more than a million consumers have used this service over the last year is proof that people are at last taking control and making banks work for them."

This is great news for competition, as banks will have to work even harder to keep existing customers and attract new ones. But the challengers are looking to bring something new to the table in the form of better service.

"They need to offer decent rates and deals to attract customers. It is great to have good products but they need to have great service, too," Mann adds.

The groups

The new groups fall into a number of different categories. There are the genuinely new upstarts such as Aldermore, Shawbrook, Ffrees Family Finance and Metro Bank, the latter of which represents Britain's first new high street bank in more than 100 years. Launched in the summer of 2010, Metro already has 360,000 customers and 27 branches, which open seven days a week, with a further six due to open this year. Another subset is inhabited by foreign groups, such as Sweden's Handelsbanken, which are looking to steal some market share.

In addition, retailers such as Sainsbury's, Tesco and M&S all have their own retail financial arms, although the latter gets its services via HSBC. Then there is TSB, which has emerged from Lloyds, while Virgin Money absorbed Northern Rock.

But despite the progress and wider competition, the challengers versus powers-that-be remains something of a David and Goliath scenario. After all, Metro's 360,000 customer base pales in comparison to the 16.7 million people who currently bank with Barclays. In fact, the 'Big Four' still control some 85% of the nation's personal current account market.

Andrew Hagger, founder of, believes the challengers have their work cut out if they will make any meaningful impact in the short term. He says: "There is still a lot of apathy among consumers when it comes to switching banks. Challengers may be giving consumers greater choice but I think it will take many years before we see the dominance shift away from the established banks.

"It's going to take time to build a reputation. The winners of tomorrow will be those with the smartest and reliable IT systems and a reputation for first-class customer service."

Despite the dominance of the high street names, many of the new contenders offer some great deals, and often top the 'best buy' tables. We've looked at a snapshot of how the new contenders compare to the banking giants (while all figures were correct at the time of writing, bear in mind that deals can disappear as swiftly as appear) and a clear trend emerges in terms of how the new battalion is shaping up against the old guard.


The UK's prolonged era of ultra-low interest rates - at 0.5% since March 2009 and still counting – has throttled savings rates, with many accounts failing to even beat inflation. But the best deals continue to be found in fixed-rate offers, where you lock your cash away for a set amount of time, typically between one and five years.

Here, the challengers have excelled. Anna Bowes, director at Savings Champion, says: "It has been a great time for the challenger banks looking to raise their profile. Competition in the savings market is being led by them, especially in the fixed-rate market."

To date, the challengers have built a strong reputation for excellent rates for both personal and business customers. Aldermore, for example, offers a customisable fixed-rate business account that allows the customer to set the expiry date, where the longer the cash is put away, the better the deal.

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While the cost of borrowing has been in the doldrums for more than five years, British households may need to tighten their belts sooner than they think as Bank of England boss Mark Carney recently gave his strongest hint yet that interest rates will rise perhaps sooner than many people expect.

While a hike in the base rate should be good news for savers, it will not be as welcome among borrowers because home loans that are tied to UK interest rates (such as tracker mortgages) will echo the increase. However, within the five-year fixed rate mortgage sector, Tesco Bank is leading the way with its 2.99% deal, although it comes with a heavy £1,495 fee. Virgin Money and Metro Bank both offer 3.49% deals and each comes with an arrangement fee just shy of £1,000.

But the least attractive deals are with the high street players: Lloyds is offering 3.64% plus a £1,260 fee, while NatWest's five-year fix is higher still at 3.65% and it charges a £995 fee.

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Mortgage five-year fixed rate at 75% LTV

Tesco Bank 2.99% £1,495 fee
First Direct 3.29% £950 fee
Nationwide BS 3.44% £999 fee
Woolwich (Barclays) 3.45% £999 fee
Virgin Money 3.49% £995 fee
Metro Bank 3.49% £999 fee
TSB 3.59% £1,260 fee
Lloyds Bank 3.64% £1,260 fee
Natwest 3.65% £995 fee

Personal loans

In terms of personal loans, the banking arms of the UK's two biggest supermarket groups take pole position. A £7,500 loan paid back over three years, for example, will incur a rate of 3.9% at Sainsbury's Bank, while Tesco Bank would levy 4.1%. The next best deals come from the old school, with Barclays and Santander each charging 4.3% for the same loan. Notably, Metro Bank levies a far heftier 7.9% – 1% more than the nearest rival deal from TSB.

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A comparison of the annual cost of an authorised overdraft

  Tariff £400 for four days a month £600 for seven days a month £1,200 for 10 days a month £2,000 for 12 days a month
Yorkshire/Clydesdale Bank Current Account Direct Interest at 9.9% EAR £5.21 £13.67 £39.05 £78.11
First Direct Interest at 15.9% EAR £5.23 £12.81 £49.66 £109.77
M&S Bank Interest at 15.9% EAR £6.27 £18.30 £57.50 £119.18
Post Office Interest at 14.9% EAR £7.84 £20.57 £58.78 £117.57
Metro Bank Interest at 15% EAR £7.89 £20.71 £59.18 £118.36
Nationwide BS - Flex Account Interest at 18.9% EAR £9.94 £26.10 £74.56 £149.13
Tesco Bank Interest at 18.9% EAR £9.94 £26.10 £74.56 £149.13

Source:, 23 September 2014

Current accounts

Some of the elements offered by new providers are good value if they suit the way you run your account: Tesco offers good credit interest deals on its current account, for example, and Clubcard rewards if you use the debit card. Similarly, Metro Bank has a low-cost debit card when used abroad – in fact, it is free to use in Europe.

If you switch to M&S Bank's current account, via the Current Account Switch Service, you will get a £100 M&S gift card for doing so. Customers can also earn one point for every £1 spent on their M&S debit card in Mark & Spencer.

In terms of in-credit interest, M&S Bank and Metro do not offer anything (but then neither do HSBC or Barclays).

Tesco Bank's current account, which launched in June, pays 3% up to a maximum of £3,000. For an average credit balance of £1,500, customers would be rewarded with annual interest of £36. TSB Bank's Classic Plus and Halifax's Reward accounts award £60 under the same circumstances.

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Elsewhere, Santander's 123 current account offers 1% interest on balances of £1,000 or over, 2% on £2,000 or more and 3% on balances between £3,000 and £20,000.

Ultimately, current accounts - historically, at least - are not known for their high interest rates but rather the overdraft charges they come with. On this basis Metro Bank has a cheap annual overdraft interest rate of 15%; however, it cannot beat Clydesdale/Yorkshire Bank's 9.9%.

M&S Bank comes in at a higher 15.9%, although the first £100 overdrawn is interest-free. Again the challengers are doing better in this respect given that the tariff on Lloyds Club account is 19.94%, rising to 19.89% on the NatWest Select account.

Remember though, if you are thinking of switching think about what you need. For example, does having a branch matter? Metro may have 27 stores but they are very South East-centric and while Tesco's supermarkets are ubiquitous, its bank remains an online/telephone operation.

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