6 key issues facing challenger banks, and how to solve them

By Kate Robinson, 18 August 2025

Challenger banks have reshaped financial services with sleek, digital-first platforms and frictionless onboarding. Their agility and innovation have set them apart, but as they scale, these same qualities often expose gaps in governance, compliance, and operational resilience.

Recent regulatory actions, including the £21m fine against Monzo this year for inadequate financial crime controls, and the £29m fine against Starling Bank in 2024 for anti money laundering failures (AML), highlight a broader trend: challenger banks must pair rapid growth with a strong regulatory control framework.

Based on our experience at Avyse Partners advising challenger banks on regulatory challenges and transformation, we’ve identified six key issues they face, and how to overcome them.

1. Managing heightened regulatory scrutiny

Challenge: Many challenger banks are founded by tech entrepreneurs without deep roots in financial regulation. As a result, governance structures, documentation, and compliance controls may lag behind their rapid growth. Regulators increasingly expect digital banks to lead on tech-enabled compliance, not view it as an afterthought.

Solution: Embed “compliance by design” from the outset, treating regulatory alignment as a core component of business strategy. You can achieve this through early hiring of competent compliance experts who align with your culture and approach, as well as by establishing clear governance lines and documenting processes rigorously. Early, proactive engagement with regulators, backed by robust records, also helps build credibility and trust.

2. Building customer trust in a fast-moving model

Challenge: Rapid onboarding can create gaps in AML and know your customer (KYC) processes, leading to frozen accounts and poor customer communication. Outages and weak operational resilience further erode trust, particularly under the lens of the Consumer Duty, which demands firms ensure positive outcomes even during service disruptions.

Solution: Integrate real-time risk screening into onboarding using intelligent automation. Prioritise strong operational resilience controls and ensure business continuity is in place before launch. Communicate clearly during delays or reviews and strengthen customer support to reduce friction when issues arise. Transparency is key to maintaining trust.

3. Scaling without sacrificing control

Challenge: Rapid growth can leave back-end systems, controls, and role clarity behind. Without a clear end-to-end view of the customer journey, digital development often becomes fragmented, leading to inefficiencies, manual workarounds, and increased regulatory risk.

Solution: Future-proof operations by investing up front in infrastructure which can grow with you, automating routine tasks, and clearly defining roles and responsibilities. Formalise decision-making processes and ensure the highest risk areas of the customer journey are well understood and digitally managed. Building control into operations early reduces firefighting later.

4. Gaining investor confidence through governance

Challenge: As challenger banks mature, investors look beyond user growth. They want strong internal controls, credible leadership, and effective oversight, especially in terms of compliance. Many firms collect rich data but struggle to turn it into meaningful insights that support strategic decision-making.

Solution: Ensure your leadership team has the skillset to analyse data and ask challenging questions which are not just centred on commercial goals. Design performance and risk reports that translate data into actionable insights, and enable better oversight. Demonstrating operational discipline is as important to investors as innovation and customer metrics.

5. Strengthening board oversight

Challenge: Challenger banks face growing scrutiny as they scale, particularly around financial crime and culture. Evolving regulations, like the Senior Managers and Certification Regime (SMCR) reforms and Non-Financial Misconduct rules, demand stronger board oversight. However, firms often lack the expertise to meet these requirements.

Solution: Appoint board members that align leadership with growth, and embed robust governance processes to ensure effective oversight, cultural accountability, and sustainable compliance.

6. Outsourcing with customer outcomes in mind

Challenge: Outsourcing customer-facing services (e.g. collections or arrears management) is often necessary, but if third-party providers don’t align with a bank’s values, customer outcomes can suffer, putting firms at odds with Consumer Duty expectations.

Solution: Conduct thorough due diligence before engaging partners, focusing on culture, conduct, and customer treatment. Once a third-party provider is in place, maintain active oversight with regular performance reviews and outcome-based assessments. Outsourcing doesn’t mean outsourcing responsibility.

Final thoughts

Challenger banks have changed the game in financial services, but now must show that they can sustain innovation responsibly. Speed and convenience remain valuable, but success increasingly depends on embedding governance, compliance, and customer-centric thinking from the ground up. Those that balance agility with accountability will not only meet regulatory expectations, but help build a more trusted financial system for the future.