Challenger banks have shaken up the financial industry, but with growth comes new challenges. As they scale, these digital-first banks are rethinking their strategies to stay competitive.
To understand how these banks are navigating this change, we spoke with industry experts who reveal the key strategic adjustments helping them stay ahead.
Speed and agility at the core
Nida Sattar, product director for payments at Allica Bank, a business-focused challenger bank, stresses the importance of speed in scaling successfully.
“This means keeping laser focus on a few key areas: hiring the right talent, streamlining processes to avoid bottlenecks as we scale, and quite often, making quick decisions on forming strategic partnerships that help us meet our objectives faster,” she says.
“The industry and market move fast, and agility is key. One of the biggest advantages challenger banks have is their nimble architecture, which allows them to adapt quickly to market changes. They can use real-time data to respond to customer needs and new opportunities faster than traditional banks.
“By staying nimble and teaming up with the right partners, players like Allica can build innovative products and solutions and ship these to market quicker, whilst growing.”
Emphasis on profitable growth and security
As the industry faces a challenging funding environment, profitability has become a key focus, says Sarah Carver, head of retail banking, wealth, and insurance at Delta Capita, a financial services business.
“With a more challenging funding environment in recent years, there has been a growing emphasis on profitable scaling, with notable examples like Starling Bank and Revolut leading the way with sustainable pricing models while scaling.
“Additionally, we have seen a steady expansion in the breadth of services from challengers, whether through new product offerings or strategic partnerships. While profitability and a competitive service offering remain key, trust is becoming increasingly critical.
“There has been a rise in cyber and ransomware attacks on challenger banks and the broader financial services industry. Although this may not become a direct customer differentiator, challenger banks have increasingly come under the scrutiny of the FCA, meaning regulatory compliance and security will remain essential as they grow.
“However, challengers have not forgotten their initial unique selling point – a laser focus on customer experience. They continue to invest in their mobile apps, with Monzo and Starling consistently topping the charts for customer satisfaction and intuitive app design.”
Access to funding and strategic partnerships
Securing affordable funding is a critical aspect of scaling for challenger banks, suggests George Donchenko, country manager at Viva Money, a digital lending platform operating in India.
“The main challenge they face in closing the scaling gap is access to low-cost funding. To overcome this, they typically establish partnerships with commercial banks or acquire stakes in other institutions to gain access to retail and corporate deposits, which are significantly cheaper than raising funds in the open market.
“In other areas, such as technology, customer experience, and customer service, these challengers are generally ahead of traditional commercial banks and therefore do not need to catch up with the more established institutions.”
Integrating blockchain and digital assets
Some challenger banks are exploring blockchain and Web3 technology to cater to the growing demand for digital assets. Tom Kiddle, co-founder of Palisade, a digital asset custodian backed by Ripple, discusses how banks like Revolut and N26 have started to offer crypto-based services.
“We are also seeing the rise of new crypto products, such as crypto-backed loans, crypto-based credit cards and stablecoins pegged to fiat currencies,” he says. “Although crypto-fintechs and major financial institutions currently dominate the market for these products, challenger banks could make significant inroads in the near future.
“Web3 technology will serve as the invisible backend for many of these institutions, helping to optimize their stack – including reducing fees and improving settlement times. Fintechs not factoring in Web3 technology will become the ‘Blockbusters’ of the financial industry a few years from now.”
Expanding offerings and embracing evolution
Many challenger banks are broadening their service portfolios by integrating with fintechs and entering new markets, according to Serena Smith, chief client officer at i2c, which provides a card issuing, digital banking and payment processing platform.
“They focus on expanding their product offerings, entering new markets, and leveraging partnerships with fintechs to enhance their service portfolio,” she says.
“Many are also investing in innovative technologies like AI and blockchain to differentiate themselves from traditional banks. i2c Inc. supports challenger banks in this endeavour by offering scalable payment processing solutions that adapt to evolving customer needs. As challengers grow, maintaining agility and customer-centricity remains key to their long-term success.”
Purpose and profitability
Looking to the future, Shilpa Doreswamy, sector director of retail banking solutions at GFT, a digital transformation specialist, stresses the importance of purpose-driven banking.
“The lines are blurring between challenger banks and incumbent banks, with both entering the next phase of digital evolution. There are shared challenges as they vie for market share, customer acquisition, customer retention and revenue growth, in a market that is increasingly becoming more demanding and informed.”
According to Doreswamy, the next phase of evolution for challenger banks will likely be to:
1. Build trust through purpose-driven banking:
“There is an ever-increasing expectation from banks to be sensitive and conscious about communities, climate, and societal issues. Customers identify themselves with whom they bank and put their trust for
financial decisions in the brands that they identify with.”
2. Address whitespaces through vertical neobanks:
“Identifying whitespaces within customer demographics and becoming relevant to specific sub-segments in certain areas is gaining more traction. This is because the unmet financial needs of each segment and
sub-segment are very specific, offering opportunities for focus and growth.
“As vertical neobanks continue to gain more traction, they will be able to address these sub-segments of customers by offering them products and services designed to address the core financial benefits not otherwise addressed by traditional banking approaches.”
3. Profitably accelerating into the digital-first world
“Digital-first banks such as Monzo, Starling, and Revolut are beginning to see increasing revenues and profit realisation. As banks accelerate into the digital-first world, aspects such as Total Cost Ownership (TCO)
and speed-to-market become critical, with a focus on profitability.”
Leveraging AI for customer experience
For challenger banks, delivering a tailored customer experience is essential to stand out with Benjamin Humphrey, CEO and founder of Dovetail, a consumer insights and user research platform, highlights the role of AI in this pursuit.
“Challenger banks are stepping up by putting customer understanding at the heart of everything they do,” he says. “They’re not just ticking boxes – they’re building products that people actually want, and that’s what gives them a real edge in such a competitive space.
“With AI and innovation in their toolkit, these banks are staying ahead of the curve. We’re seeing AI chatbots take on a bigger role, cutting down the need for phone calls and giving customers the quick answers they expect. Behind the scenes, AI is just as crucial – helping teams analyse feedback in real-time, spot trends, and share insights across the business so they can pivot fast on product and strategy.
“A recent survey from Plaid showed that 60 per cent of consumers believe AI will reshape financial services in the next five years. AI isn’t just a buzzword—it’s poised to help lower costs, sort out customer issues, give advice on budgeting, manage subscriptions, and deliver personalised financial guidance. It’s all about automation and personalisation—that’s where the future of finance is heading.”
