High street banks struggle as they lose £100 billion in customer savings

The UK banking sector is facing significant challenges as traditional high street banks have witnessed a substantial decline in customer deposits, losing £100 billion to online banks and building societies since 2019. According to KPMG's State of the Banks report, the market share of traditional banks in terms of deposits dropped from 84% in 2019 to 80% by 2024. This shift was largely fueled by competitive offerings from new challenger banks and specialist lenders that provided higher savings rates. Additionally, the sector saw a combined drop in total pre-tax profits of £3.7 billion last year, marking the first major downturn since the post-COVID rebound. The current environment is characterized by increased competition, rising costs, and a decline in worker productivity, which together threaten profitability in the banking sector. KPMG's experts indicate that the average return on equity for banks may decrease significantly, falling from a high of 13% in 2023 to about 8% by 2027, translating to a potential £11 billion drop in annual profits. In order to survive, banks must consider overhauling their business models and embracing technological innovations, particularly artificial intelligence, to navigate these turbulent times. KPMG also emphasized the importance of regulatory changes, particularly regarding ring-fencing—the requirement for banks to separate their retail activities from investment banking. Recent announcements by Chancellor Rachel Reeves indicated a desire to reform this regime, which could accelerate competition and favor new entrants, particularly well-capitalized American banks seeking to expand into the UK retail market. Experts suggest that unless traditional banks act swiftly to transform their models, they may find it difficult to remain competitive in an evolving landscape that demands agility and adaptation. This period of transition is critical for UK banks as they attempt to regain lost market share and maintain their relevance amid an increasingly challenging financial environment.