Three Asian institutions dominate The Banker’s first-ever ranking of challenger banks by Tier 1 capital, as well as for profit growth. However, most new entrants are still not turning a profit. 

The wave of new banks, or challengers, that have emerged across the world in recent years are undoubtedly shaking up the banking industry. Their rise can be attributed to an opening up of the regulatory environment, evident in the willingness of regulators to grant new licences to increase competition in the wake of the global financial crisis.

In addition, the cost of setting up a new bank has plummeted due to emerging technology, such as the cloud. As fintech research company Burnmark commented in its 2016 Challenger Banking report: “The seismic impact of technology, in particular, is altering the cost structure of the banking industry in such a way that what once was a barrier to new entrants has suddenly become a bottleneck for incumbents.”

While challenger banks may not be going head-to-head with the large incumbent institutions quite yet, they are gaining traction in many markets by providing a much better customer experience at a lower cost and with greater reach through the mobile channel. In this way, they are accelerating financial inclusion as well as banking innovation. And although many started out with a monoline business strategy in one country, they are now beginning to expand their product offerings and geographical footprint.

There are numerous business models under the ‘challenger bank’ umbrella, some of which do not require a banking licence, which makes it difficult to perform a comparable analysis. Hence, for The Banker’s inaugural top challenger banks ranking we decided to include only those entities which have been granted banking licences in the past 10 years, are bank holding companies (thus excluding incumbents’ subsidiaries) and have published annual reports for 2019. While this narrowed the field considerably and omits several well-known challengers, it did allow for a more robust comparison across the cohort.

Chinese challengers in front

In first place in The Banker’s Top 30 Challenger Banks 2021 ranking is China’s WeBank, which recorded $1.74bn in Tier 1 capital in 2019, a 26% year-on-year increase. Launched by digital giant Tencent in early 2015, WeBank focuses on consumers and micro, small and medium-sized enterprises (SMEs). The online-only bank also appears in the top five list for pre-tax profit (PTP) growth, return on capital (ROC), return on assets (ROA) and cost-to-income ratios.

Its compatriot, MYbank, is placed third for Tier 1 capital. The bank, e-commerce titan Alibaba Group’s response to Tencent’s move, was launched in mid-2015 and also focuses on the mass retail and SME sectors. And akin to WeBank, MYbank is one of the best performers in several metrics, including Tier 1 capital growth (a 93% rise), as well as PTP growth and ROC.

Impressively, both Chinese banks recorded PTPs in 2019. Only eight of the 30 banks included in the 2021 ranking managed to make a return, which foreshadows a shift in focus from growth and customer acquisition to profit-generation that needs to happen for these banks to survive in future.

Sandwiched between the Chinese challengers is South Korea’s KakaoBank, in second place with Tier 1 capital of $1.39bn. Launched in mid-2017 as one of the country’s first digital banks, KakaoBank offers consumers online/mobile-only banking services. The bank managed to increase its Tier 1 capital by 45% over the past year, earning it eighth place in the top 10 by Tier 1 growth table.

Operational efficiency

UK challengers are the most numerous in The Banker’s inaugural ranking, with six banks making an appearance, led by OakNorth Bank with Tier 1 capital of $610m. The country also saw four banks place in both the top 10 list by asset growth, as well as the top 10 by Tier 1 capital growth.

OakNorth, which secured a full banking licence in March 2015 and provides business and property loans for SMEs, is the only one of the UK challengers to make a profit in 2019, doubling PTP to $87m. Impressively, it is the most efficient bank in this cohort, with a cost-to-income ratio of 30.8%.

A widely-held belief is that digital players almost by definition should have a lower cost-to-income ratio than incumbent banks; however, only five of the 30 challengers in this ranking have a ratio of under 49.9%, the average cost-to-income ratio of The Banker’s Top 1000 World Banks 2020 ranking. Spain’s WiZink Bank comes in second to OakNorth in the cost-to-income table, recording a 33.2% ratio, followed by WeBank at 35%. Malta’s Ferratum Bank and Brazil’s Agibank round out the table with ratios of 43% and 47.2%, respectively.

Brazil is also well represented, with four banks in the main ranking. Banco Original, which launched in March 2016, leads the country grouping, reporting Tier 1 capital of $341m. Rival Nubank, which was founded in 2013, is not far behind, with $249m in Tier 1. However this is 10.5% down on the previous year.

Banco C6, in 20th place in the main ranking, tops the table for asset growth, with a massive 1137% surge in assets. Agibank, in addition to its strong cost-to-income ratio showing, places among the top five for ROA and ROC.

Missing in ranking

As mentioned, The Banker’s inaugural ranking does not include several prominent challengers that one would expect to see in such a list, including the UK’s Revolut, Germany’s N26 and Fidor Bank, Australia’s 86 400, Japan’s Rakuten Bank, Hong Kong’s Ant Bank, Spain’s Openbank and the US’s Chime, to name just a few. These entities did not fall within the specified criteria: bank holding companies with bank licences issued in the past 10 years, which have published 2019 results.

For example:

  • Revolut received a Lithuanian banking licence in 2018; however, in 2019 most of its business ran through its UK e-money institution;
  • N26, which was issued a banking licence from the European Central Bank in 2016, is a privately-held company and will publish 2019 annual revenue figures in first quarter of this year;
  • Fidor Bank started out independently and was then acquired by Groupe BPCE in 2016, thereby becoming a subsidiary, whereas Openbank remains part of the Santander Group;
  • Rakuten Bank, a leader in digital banking, has been in operation since 2000;
  • Chime, like many other US challengers, does not hold a banking licence but partners with an incumbent bank, the Bancorp Bank, to underpin its banking services.

Many banks, including 86 400 and Ant Bank, as well as eight other Hong Kong challengers, only received their banking licences in 2019 and have not built out their bank offering sufficiently to be included in the inaugural list.

Despite not appearing in this year’s ranking, our data analytics team is nonetheless tracking all of these and more challenger banks’ progress in The Banker Database.

Clearly, the rise of the challenger bank is just beginning. Last month, the Monetary Authority of Singapore granted licences to four new digital banks, which are expected to commence operations early in 2022. Likewise, many other jurisdictions worldwide are encouraging competition in financial services by allowing innovative new entrants to challenge the incumbent players.

Top 30 Challenger Banks

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