Leading Online Banks for UK Customers Compared & Reviewed

Both traditional and online-only banks in the UK allow you to access your bank accounts online. You can perform basic tasks, like checking your balance, transferring money, or paying bills, with a few clicks.

They are both subject to the same laws and regulations: the FCA and PRA regulate all banking institutions regardless of the business model, and the FSCS covers your funds.

But even though both types of institutions serve the same purpose, there are still some important distinctions to make.

Besides providing an intuitive online experience, online-only banks also challenge the high-fee, low-yield model of high-street banks. With no physical branches and significantly lower overhead costs, digital banks are able to provide low to no-fee services and higher-than-average interest rates.

Having a bank account is a necessity, but it’s often treated as a luxury. Neo-banks challenge this notion, among other things. Many only run through a “soft” credit check and streamline the application process. Combined with lower costs, it provides a significant advantage to the under-banked and unbanked communities.

Perhaps the biggest caveat is that digital banks tend not to undertake personal loans or issue credit cards in a bid to reduce the risk.

They do, though, tend to offer marketplaces where customers can access third-party providers for such services. Starling’s marketplace, for example, provides customers with numerous mortgage, loan, and even investment providers and supports full integration of accounts.

• For more options, visit our list of the best banks for mortgages.

The prime difference between online-only banks and traditional banks is that online-only banks, as the name suggests, are designed with a digital mindset from the get-go. Meanwhile, their traditional counterparts have to go through the process of digitalisation – which can be hefty.

For this reason, challenger banks have been able to capitalise on newer agile technologies with ease and offer innovative services that traditional banks in the UK struggle to match.

Here are some of the features and services that set digital banks apart from their high-street counterparts:

• Detailed spending insights to see where your money is going

• Bill splitting

• Fee-free spending and ATM withdrawals abroad

• Multicurrency accounts, including euro and dollar accounts

• Instant notifications for bank account activity

• Easy sign-up process that takes less than a day

• Ability to set spending limits

• Budgeting tools

• Junior accounts with robust parental controls

• Saving pots that can be dedicated to specific goals

• Behavioural limits, such as for online gambling

• Future spending projections

• In-app investing

While digital banks are not so big on borrowing facilities, you’ll find major names offering overdrafts.

The biggest distinction lies in the legal circumstances around the institution. E-money institutions like Revolut, Monese, or Wise don’t offer overdrafts – whereas licensed banks like Monzo or Starling do. And more often than not, you’ll find more favourable interest rates and comparable limits.

The biggest caveat is for students. While online-only banks offer attractive rates as well as cashback and discount offers that would benefit students enormously, none offer 0% interest student overdrafts – which, arguably, is also enormously advantageous.

• There are plenty of options that offer 0% interest overdrafts — to learn more, visit our list of the best student bank accounts in the UK.

Overdraft limits & fees: A comparison

However good they may seem, online-only banks come with their own set of disadvantages. Here’s a rundown of the pros and cons of digital banks:

As we said before, digital banks are subject to the same rules and regulations as high-street banks. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) regulate any bank services to UK residents.

As per the FCA regulations, the Financial Services Compensation Scheme protects all balances for up to £85,000 in the event of banks going insolvent. Banks listed above, barring Monese, Revolut, and Wise, have banking licenses and are fully regulated as UK banks. This means that your money is protected in the same way as it would be with the likes of Lloyds, Santander, or HSBC.

Others that we list, Monese, Revolut, and Wise, are considered e-money institutions – which are still regulated by the FCA, but are not covered by FSCS directly. As per these regulations, they have to keep client funds in segregated accounts with regulated UK banks. This means that in the event of the institution going bankrupt, your funds will not be seized.

Challenger banks have been on the rise since the 2010s. Due to their digital-first business model, they have done a better job of catching up with the accelerating digitalisation that affects every industry – so much so that incumbent banks are yet to match their services.

Yet, they have some distinctive weaknesses. First off, they tend to think globally rather than locally, meaning that some services, like ISA accounts, are not widely available. They also mainly focus on retail customers and often miss out on high-worth individuals or big corporations.

But why should you care about this? It may pose a problem in the long haul for digital banks to survive financially, and only time will tell whether their business model is sustainable. In summary, these banks are not time-tested as high street banks, so their chance of bankruptcy may be higher than traditional banks.

Online banks usually run a “soft” check of your credit report, unless you apply for an overdraft – in that case, it’s usually a hard check.

A hard check involves a review of your credit record, and it may affect your overall rating and eligibility. Lenders can view the hard checks you go through.

A soft check only provides banks with a view of your credit eligibility, which doesn’t affect your rating, and lenders cannot view it.

There are two main reasons why banks conduct these searches:

• They check your identity – Through a credit check, banks ensure that you are the person that you say you are, and don’t impersonate someone else.

• View your borrowing history – Banks may want a top-level view of your credit history so they can pre-approve any offers or show you what you are eligible for.

As we said, if you do apply for an overdraft, which some UK online banks offer, the soft check turns into a hard check. To reiterate, soft checks don’t affect your credit score, but hard checks might.

As we said before, challenger banks maintain their edge against their traditional counterparts by offering feature-rich apps that encourage and help in saving and budgeting.

To start with, they give you real-time notifications when you spend or save, which is a great help for staying on top of your finances. You also get valuable insights into your spending habits through spending insights and instant notifications. This means that you’ll be able to see how much you spend in what shop, and what category. It can help you identify your secret money suckers and build healthier spending habits.

So go ahead, explore the features, set your budget limits, categorise your spending using pots, and allocate yourself allowances for each type of spending. All these features are designed to help you understand where your money goes each month, and how can you manage it more effectively.