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Analysis of Select UK Challenger Banks’ Tech Cost as Part of Operational Expense

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February 3, 2021
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February 3, 2021
Analysis of Select UK Challenger Banks’ Tech Cost as Part of Operational Expense

Challenger banks are more technology- and digital-focused when it comes to their operating models and service delivery than the traditional incumbents. After the 2008–09 financial crisis, the banking sector suffered a massive loss of trust and has been undergoing incremental reform ever since, especially in the developed markets. Legacy technology systems and processes remain constant for most banks globally to this day. Traditional banks have been trying to adopt new technologies, but progress has been slow. Traditional banks are now facing intense competition from FinTech players that are young, dynamic, and more adept at providing financial services in today’s digital era.

Unlike their traditional counterparts, challenger banks are not burdened by ancient legacy systems, complicated organizational structures, and heavy regulatory requirements. As a result, these players can use technology to offer superior customer service, simplify the processes, and create cheaper or different offerings from traditional banks. In this article, we analyze the cost of technology incurred by four challenger banks and how much of it constitutes their overall operating expenses to understand how challenger banks are spending to differentiate themselves from the traditional banks in the UK.


Four challenger banks were analyzed—Starling Bank, Monzo, Atom Bank, and OakNorth. In 2017, these challenger banks had spent 25% on average on technology, including software (on-premise licenses & cloud), hardware, and the cost of human resources concerning technology. In 2018, the number had decreased to 21.2%, and in 2019, the number slightly increased to 22.7%. Starling and OakNorth have captive IT units as separate legal entities. Starling Bank provides BaaS to others from its entity, while OakNorth has offshored its IT operations. In Starling Bank’s case, it has created Starling FS Services Limited. Starling Bank is charged monthly for using software owned by Starling FS Services limited as the parent company. OakNorth has created an entity called OakNorth Global Private Limited, based out of India, and provides IT-enabled services to its parent company, OakNorth. Since the captive unit is based in India, it reduces the technology cost due to the lower cost of talent available in the country. In Monzo and Atom Bank’s case, both have internal technology teams. As evidenced in the chart above, it seems that these challenger banks incur higher technology costs compared to Starling Bank and OakNorth.

In terms of numbers, OakNorth incurs the lowest technology cost as a percentage of its operating expense, an average of 14.7% in the last three years. Starling Bank’s tech cost is the second-lowest, with an average of 23.2% from 2017 to 2020. The second-highest tech costs are borne by Monzo, with an average of 25.5%. Atom Bank incurs the highest tech cost among the four challenger banks, at an average of 28.3%. Compared to the industry average of 10%, these challenger banks’ technology costs are relatively high because their value proposition is technology-centric. This demonstrates the higher emphasis which digital-only banks have on technology compared to their traditional incumbents. In the early years of the challenger banks, this number remains high. However, as the challenger banks evolve and add more operational value-added services such as customer service, the technology cost/operational expense gradually decreases.

In the financial sector, digital-only banks are usually the first-movers in utilizing the latest technology stacks to set up higher customer service benchmarks. They innovate around the digital customer journey and experience through innovations that help them compete with incumbents; they need to keep investing in the latest technology.

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