High street lenders have lost the equivalent of £100 billion in customer savings to online banks and building societies as they come under pressure to adapt amid a major shift in the sector, according to a report.
KPMG’s latest State of the Banks report found that traditional banking groups saw their market share in deposits drop sharply from 84% in 2019 to 80% in 2024.
It came as competitors – such as new challenger banks, specialist lenders and building societies – lured customers away by paying higher savings rates.
The UK banking sector also suffered a £3.7 billion combined drop in total pre-tax profits last year, marking the first major downturn since the rebound seen in the wake of the pandemic, according to KPMG.
It warned that increasing competition, rising costs and a wave of consolidation will change the shape of the sector in the years ahead.
Peter Westlake, partner in KPMG UK’s banking strategy team, said: “The post-Covid profit boom is over.
“Banks are facing a lower-growth, higher-cost environment that demands transformation at pace.
“While we can expect profitability to broadly remain sound this year, the entire sector needs to show how they are preparing for challenges ahead.”
Bank costs increased by 6% in 2024, which together with falling productivity among workers, is set to put bank profits under pressure, according to the report.
It forecasts that the sector’s average return on equity, which is a key performance measure for banks, could drop by more than a third from a peak of 13% in 2023 to 8% by 2027 – the equivalent of an £11 billion drop in annual profits.
KPMG’s experts urged banks to overhaul their business models and embrace artificial intelligence (AI) to tackle the challenges.
“The winners will be those that move beyond tactical cost-cutting and proactively address oncoming market headwinds through business model transformation,” said Mr Westlake.
Any move to scrap so-called ring-fencing in the UK sector, which requires banks to separate their retail activities from investment banking, would also spur on further change, KPMG said.
Chancellor Rachel Reeves announced plans to reform the ring-fencing regime last month as part of wider measures to loosen regulation and boost growth.
Peter Rothwell, head of banking at KPMG UK, said: “Evolving regulation, particularly the reform of ring-fencing, is set to reshape the competitive landscape.
“Raising thresholds could favour recent entrants, particularly well-capitalised US players, accelerating their push into the UK retail market and intensifying competition.”
