Published: 04 August ‘2025 | The English Chronicle Desk
High street banks in the United Kingdom are witnessing a dramatic shift in customer behaviour, with an estimated £100 billion in savings being redirected toward online challenger banks and building societies. The trend, attributed to more competitive savings rates offered by these digital institutions, reflects a significant erosion in the traditional banks’ dominance. Market share for major high street lenders has declined from 84% in 2019 to 80% in 2024, according to data released by KPMG.
This redirection of customer deposits has contributed to a substantial decline in the banking sector’s profitability. Last year, the combined pre-tax profits across UK banks fell by £3.7 billion — marking the first major downturn since the post-pandemic recovery. Analysts predict the average return on equity, a key performance indicator in banking, will continue to fall, dropping from 13% in 2023 to just 8% by 2027. This would equate to an £11 billion reduction in annual profits.
KPMG warns that the banking sector is entering a period of lower growth and rising costs, urging institutions to rapidly adapt to remain competitive. The migration of customers from traditional banks follows public criticism in 2023, where major institutions such as HSBC, Barclays, NatWest and Lloyds Banking Group were accused of taking advantage of rising interest rates while offering low savings returns.
Such allegations drew political attention, prompting calls for a windfall tax to be imposed on banks—similar to policies already enacted in countries like Spain, Lithuania, and the Czech Republic. However, UK policymakers have so far resisted such measures, despite ongoing public dissatisfaction during the ongoing cost of living crisis.
Peter Westlake, banking strategy partner at KPMG UK, acknowledged the seriousness of the situation. He stressed that while short-term profitability may remain relatively stable, the sector as a whole must embrace transformation to remain viable in the face of growing challenges. Westlake pointed to innovations such as artificial intelligence and smarter business model redesigns as possible avenues for boosting performance amid increasing operational costs, which rose by 6% in 2024.
Compounding the problem is a noted decline in workforce productivity within banks, placing even more strain on profit margins. According to KPMG’s analysis, the institutions that will thrive in this new environment are those that move beyond simple cost-cutting and actively embrace structural change to address market turbulence.
As UK savers continue to seek better value from their financial providers, the banking landscape is set for more disruption — with agility, innovation and consumer trust emerging as decisive factors for long-term success.
