Challenger Banks Raise Record Funds To Take On Traditional FIs

Digital challenger banks are hoarding money to take on traditional banking competitors and have raised a total of $2 billion from eager investors, The Financial Times reported on Tuesday (Aug. 13).

The $2 billion was raised in 55 rounds of funding through July 31, with customers depositing more than $30 million, the FT said, referring to a report released by search firm CB Insights.

Companies in India and China such as Alipay and Tencent were excluded from research.

Digital banking startups are popular in Europe, dangling low fees and mobile apps to attract more customers.

Challenger banks have raised $100 million worldwide in the second quarter and are the fastest-growing FinTechs, Lindsay Davis, a senior intelligence analyst at CB Insights, told the FT.

“We’ve reached an inflection point with the consumers’ willingness and readiness to adopt these products and services,” Davis told the FT. “They’re also coming into wealth for the first time,” she said, regarding millennials.

While U.K. banking startups hold bank charters, the U.S. challengers partners with traditional banks to get backing from the Federal Deposit Insurance Corporation (FDIC).

Challenger banks have been hammered critically by some analysts for using bold marketing tactics to win over new customers, the FT said.

The bank-FinTech collaboration trend has hit the small business customer segment particularly strong. However, there is evidence that there may be another growing divide in the financial services sector as FinTech firms and alt lenders target small businesses, while traditional banks invest their technology resources into larger corporate clients.

The most recent evidence of this comes from a research report by Balboa Capital, which found that nearly two-thirds of SMBs obtained a small business line of credit from a nonbank lender within the last year. Small firms pointed to a more seamless application process and faster access to capital as their top motivators for turning away from traditional FIs and toward alternative lenders.