UK Savers Flood Online Banks, Leaving High Street Banks Bleeding Deposits

UK Banks Face Profit Pressure as Costs Rise and Productivity Falls

London, UK – UK banks are bracing for a challenging period as rising costs and declining worker productivity threaten to squeeze profits, according to a new report from KPMG UK. The findings come after a period of scrutiny over bank profitability, sparked by concerns that savings rates lagged behind increases in mortgage and loan interest rates in 2023.

Executives from major high street banks – Lloyds Banking Group, NatWest, HSBC, and Barclays – faced intense questioning from regulators and Members of Parliament last year regarding the disparity. This led to calls for a windfall tax on bank profits to alleviate the financial strain on consumers during the cost of living crisis, a measure implemented in several European countries but resisted by UK policymakers.

KPMG’s report reveals that bank costs increased by 6% in 2024, exacerbating the pressure on earnings. Coupled with a drop in worker productivity, the sector is facing a “lower-growth, higher-cost habitat” demanding rapid transformation, warns Peter Westlake, a partner in KPMG UK’s banking strategy team.”While profitability is expected to remain broadly sound this year, the entire sector needs to demonstrate preparedness for the challenges ahead,” Westlake stated.

Beyond Cost-Cutting: The Future of Banking

The report suggests that traditional cost-cutting measures alone will not be sufficient to navigate the evolving landscape. Banks are being urged to explore innovative strategies, with a particular focus on leveraging artificial intelligence (AI) to boost efficiency and unlock new revenue streams.

“The winners will be those that move beyond tactical cost-cutting and proactively address oncoming market headwinds through business model transformation,” Westlake emphasized.

The Savings Rate Debate: A Lingering Issue

The pressure on bank profits arrives amidst ongoing debate about fairness in the financial system. The initial concerns that prompted parliamentary scrutiny – the gap between savings and borrowing rates – remain relevant for consumers.While the Bank of England has raised interest rates to combat inflation, the extent to which these increases are passed on to savers continues to be a point of contention.

Long-Term Implications & The Rise of Fintech

This period of challenge for traditional banks also presents opportunities for fintech companies.The demand for better savings rates and more innovative financial products could accelerate the shift towards challenger banks and digital financial services.

Banks that successfully embrace technological advancements, particularly AI, and adapt their business models will be best positioned to thrive in the long term. Those that fail to do so risk losing market share to more agile competitors and facing continued pressure from regulators and consumers alike.

A related development saw Zopa launch a current account offering cashback and a 7.1% interest rate on savings,highlighting the competitive pressures within the banking sector.

Are you considering switching savings too an online bank to benefit from possibly higher interest rates?

The Digital Bank Surge: A Changing Landscape for UK Savings

The UK’s banking sector is witnessing a important shift in consumer behavior. Increasingly, savers are abandoning conventional high street banks – institutions like Barclays, Lloyds, and NatWest – in favour of online-only banks. This isn’t a subtle trickle; it’s a flood, resulting in substantial deposit outflows from established players and rapid growth for digital challengers. This trend, accelerating throughout 2024 and into 2025, is reshaping the competitive landscape of UK retail banking.

Why the Exodus? Key Drivers of the Shift

Several factors are fueling this migration to digital banks. Understanding these is crucial for both savers and those invested in the financial sector.

Higher Interest Rates: This is arguably the biggest draw. Online banks, with lower overheads than their brick-and-mortar counterparts, can consistently offer more competitive interest rates on savings accounts. Platforms like Chip, Plum, and Raisin have become synonymous with maximizing returns on cash deposits.

User Experience (UX) & Fintech Innovation: Traditional banking apps are often clunky and outdated. Online banks prioritize a seamless, intuitive user experience. features like automated savings tools, instant access to funds, and integrated budgeting apps are highly appealing, particularly to younger demographics.

Reduced Fees: Many high street banks still charge fees for certain services.Online banks typically offer fee-free banking, further enhancing their value proposition.

Convenience & Accessibility: 24/7 access via mobile apps and websites is a major advantage. Savers aren’t restricted by branch opening hours or geographical limitations.

Growing Trust in Fintech: initial skepticism surrounding the security of online banks is waning. Robust security measures, including encryption and fraud protection, are now standard practice. The Financial Services Compensation Scheme (FSCS) protection, up to £85,000 per depositor, provides further reassurance.

The Impact on High Street Banks: A Deposit Drain

The consequences for traditional banks are becoming increasingly apparent. Reports from the Bank of England indicate a steady decline in deposits held by major high street banks over the past two years. This isn’t just about lost revenue; it impacts their ability to lend and generate profits.

Shrinking Net Interest Margins: As deposits dwindle, high street banks are forced to compete more aggressively for funding, squeezing their net interest margins.

Branch Closures: The decline in foot traffic is accelerating branch closures across the UK, impacting accessibility for some customers, particularly those in rural areas.

investment in Digital Change: High street banks are scrambling to invest in their own digital offerings to compete, but catching up to established fintechs is proving challenging.

Focus on Wealth Management: Many are pivoting towards wealth management and other fee-based services to offset the decline in traditional banking revenue.

Online Bank Leaders & Market Share Growth

Several online banks are leading the charge, attracting significant inflows of deposits.

Monzo: A pioneer in the challenger bank space, Monzo boasts over 9 million customers and continues to expand its product range.

Starling Bank: Known for its excellent customer service and innovative features, Starling has also experienced rapid growth.

Revolut: Initially focused on foreign exchange, Revolut has evolved into a comprehensive financial platform offering savings accounts, trading, and cryptocurrency services.

Chip: Specializes in automated savings, helping users save small amounts regularly without even noticing.

Plum: Another automated savings platform, Plum uses AI to analyze spending habits and identify opportunities to save.

These platforms are collectively gaining significant market share, eroding the dominance of traditional banks. Data from Statista shows that challenger banks now account for approximately 10% of all current accounts in the UK, a figure expected to rise sharply in the coming years.

The Role of Cash ISAs and Fixed Rate Bonds

The demand for higher returns is also driving increased interest in Cash ISAs and fixed-rate bonds offered by online banks. These products allow savers to earn tax-free interest on their savings, making them particularly attractive in the current economic climate.

cash ISAs: Offer a tax-efficient way to save, with interest earned being exempt from income tax.

**Fixed Rate Bonds