KPMG Highlights Shift to Alternative Banking Options Amid Increased Savings Rates
Mainstream banks in the UK have experienced a significant withdrawal of savings, totaling around £100 billion, as customers increasingly opt for online banks, challenger banks, and building societies, according to recent data.
Specialists at KPMG have observed that these alternative financial institutions, including new market entrants and specialist lenders, have been successful in attracting customers away from traditional banks by offering more attractive savings rates. Consequently, the market share of conventional banks in terms of deposits has fallen from 84% in 2019 to 80% by 2024.
Financial Performance Deteriorates Among Traditional Banks
The banking industry as a whole saw a £3.7 billion reduction in total pre-tax profits last year, marking a significant downturn since the recovery period post-pandemic.
Furthermore, a key indicator of financial health in the sector, the average return on equity, is projected to decrease drastically. From a high of 13% in 2023, it is expected to drop to 8% by 2027, representing an £11 billion fall in annual profits.
KPMG has issued a warning about the pressures facing banks, which need to evolve in response to increased competition and escalating costs.
The exodus of customers from traditional high street banks has been partly attributed to the perception that these institutions have capitalized on rising interest rates without offering fair returns to savers.
Political and Regulatory Scrutiny Intensifies
In response to concerns that savings rates were not keeping pace with the rapidly increasing mortgage and loan interest rates, top executives from major banks such as Lloyds Banking Group, NatWest, HSBC, and Barclays were summoned for discussions with regulators and lawmakers in 2023.
This situation has fueled discussions regarding the potential introduction of a windfall tax on banks to offset the financial strain on consumers amid the cost of living crisis. While similar measures have been implemented in countries like the Czech Republic, Lithuania, and Spain, UK officials have yet to decide on such a policy.
Peter Westlake, a partner in KPMG UK’s banking strategy team, commented on the challenges facing the banking sector: “Banks are operating in an environment of lower growth and higher costs, necessitating rapid transformation. Although profitability is expected to remain relatively stable this year, the industry must demonstrate readiness to tackle forthcoming challenges.”
Bank operational costs saw a 6% increase in 2024, and coupled with declining worker productivity, further pressure on bank profits is anticipated, as highlighted in KPMG’s findings.
Westlake suggested that banks might need to explore unconventional methods to enhance profitability, including the adoption of artificial intelligence. He emphasized that the successful institutions will be those that look beyond mere cost-cutting and proactively adapt their business models to address upcoming market challenges.
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