High street banks across the UK have lost the equivalent of £100bn in savings as more customers turned from traditional lenders towards online banks and building societies, figures show.
Experts at KPMG said rival banks – including new challenger banks, specialist lenders and building societies – had lured customers away from incumbent banking groups with higher savings rates. The traditional banks’ market share in deposits dropped from 84% in 2019 to 80% in 2024, it added.
Meanwhile the banking sector collectively suffered a £3.7bn combined drop in total pre-tax profits last year, marking the first major downturn since the rebound in the wake of the pandemic.
The sector’s average return on equity, a key performance measure, is expected to fall by more than a third, from a peak of 13% in 2023 to 8% by 2027. That is equivalent to an £11bn drop in annual profits.
KPMG warned that banks were under pressure to adapt to major changes in the sector, including increased competition and rising costs.
The flight of customers from high street lenders follows a period in which banks were accused of “profiteering” from rising interest rates by offering paltry returns for savers.
Executives from big high street names such as Lloyds Banking Group, NatWest, HSBC and Barclays were hauled into meetings with regulators and MPs in 2023, amid concerns that interest offered on savings lagged far behind the soaring interest rates for mortgages and loans.
These concerns sparked debate over whether the government should impose a windfall tax on banks, to recoup costs for consumers during the cost of living crisis. Similar policies were introduced in the Czech Republic, Lithuania and Spain, but UK politicians have so far refused to follow suit.
Peter Westlake, a partner in KPMG UK’s banking strategy team, said: “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 rose by 6% in 2024, which – together with falling productivity among workers – could put bank profits under further pressure, according to KPMG’s report.
Westlake suggested that banks could turn to less conventional methods to boost profits, including by embracing artificial intelligence. “The winners will be those that move beyond tactical cost-cutting and proactively address oncoming market headwinds through business model transformation,” he said.
