Should you bank on one of the new ‘challengers’?

A raft of so-called challenger banks, with names like Monzo, Starling and Revolut, has emerged in the last few years – each promising to manage our money differently, to suit the cashless lives we now lead.

Many seem appealing, with low rates and various packages of vouchers and discounts, depending on how you use their services.

But are they fundamentally different to the established banks, or is it just a matter of marketing?

If you’ve heard of Monzo at all, it may be for the wrong reasons. A few weeks ago, it closed its fee-charging Monzo Plus account to new customers, only four months after it had been launched. “Things just haven’t gone the way they should have,” it said on its website, which is not what you want to hear from a bank.

The monthly charge of £6 was for what Monzo called “swag”, a term more usually associated with bank robberies than with accounts, but in this case constituting stickers and items of clothing – again not something you really need from a bank.

Despite the setback, Monzo has more than 3m customers, many of them in the younger age bracket its marketing has targeted. It launched in 2016 under the name Mondo, offering prepaid cards which could be used around the world free of charge. Current accounts, overdrafts, loans and savings have since followed, but unlimited withdrawals from cash machines abroad have been dropped.

Starling Bank, set up in 2014, also offers current accounts and overdrafts, and pays interest on current account balances. It also supports accounts in euros and you can pay money into your account at a post office.

Revolut is a horse of a different colour, specialising in currency exchange and supporting around 30 so-called cryptocurrencies. However, it is not actually a bank, and deposits you make there are is not covered by the Financial Services Compensation Scheme. Nevertheless, it claims to have more than 8m users.

What all of these challengers have in common is their reliance on apps, rather than branches, and in that respect they are not radically different to the established First Direct, a subsidiary of HSBC – which is very much a proper bank.

First Direct was established in the 1980s as a telephone-only establishment, though you could use the branches of the parent company to make deposits. It has evolved into an internet bank but its services are broadly in line with those of any of its competitors.

However, the rise of Monzo and its ilk clearly has HSBC worried, and last month it announced an overhaul that would position First Direct in the same, millennial marketplace. A “financial autopilot” that would use artificial intelligence to automate the topping-up of savings accounts was among the features it has promised for next year.

It says it will also allow those with limited credit histories to open accounts, as part of a move to become “more accessible to a wider population”.

But in the final analysis, banking is about money, and your choice – for your children as well as yourself – should be governed by practical incentives rather than gimmicks. Students, for instance, can benefit from guaranteed overdrafts and free railcards if they sign up to designated accounts at specific banks. Sandander’s student account is perhaps the best known, and a few banks offer other accounts targeted at retirees.

The ability of the challenger banks to shake up the market may be good for us all in the long term, but given what happened to the system a decade ago, there is still something to be said for banking on someone you’ve actually heard of.