KPMG warns of major profit slump as savers abandon big banks for better-paying online rivals

Britain’s biggest banks have suffered a massive £100bn loss in savings deposits as customers desert high street names for online challengers, specialist lenders and building societies promising far better returns.

KPMG data shows the traditional banking giants’ share of deposits has shrunk from 84% in 2019 to just 80% in 2024. The consultancy said digital-first banks and building societies have been luring savers away with market-leading interest rates, leaving legacy lenders scrambling to hold onto cash.

The shift comes after a wave of public anger over accusations that high street banks were “profiteering” from rising interest rates. While mortgage and loan costs soared, the big names – including Lloyds, NatWest, HSBC and Barclays – offered only meagre returns for savers.

In 2023, executives from these banks were summoned to meetings with regulators and MPs to explain why rates on savings accounts lagged so far behind the Bank of England base rate. The controversy even sparked calls for a windfall tax on bank profits to help struggling households – a move seen in countries such as Spain, Lithuania and the Czech Republic – though Westminster has so far resisted.

The exodus of deposits has been matched by a downturn in the sector’s overall financial performance. KPMG reported that the UK banking industry saw pre-tax profits fall by £3.7bn last year – its first major drop since the post-pandemic rebound.

The outlook is equally grim. The sector’s average return on equity – a critical measure of profitability – is forecast to fall by more than a third, from 13% in 2023 to just 8% by 2027. That’s equivalent to an £11bn annual hit to profits.

“Banks are facing a lower-growth, higher-cost environment that demands transformation at pace,” warned Peter Westlake, partner in KPMG UK’s banking strategy team. “While we can expect profitability to broadly remain sound this year, the entire sector needs to show how they are preparing for challenges ahead.”

Part of that challenge is cost. Bank expenses rose by 6% in 2024, and KPMG notes that productivity among bank employees has fallen. With shrinking margins and fewer deposits to work with, the traditional players are under intense pressure to adapt.

Westlake suggested that simply slashing costs will not be enough. Instead, he pointed to business model overhauls, including a greater embrace of artificial intelligence, as the route to survival. “The winners will be those that move beyond tactical cost-cutting and proactively address oncoming market headwinds through business model transformation,” he said.

Digital challengers like Zopa, which recently launched a current account offering cashback and savings rates of up to 7.1%, have set a new benchmark for returns – forcing the big banks to either compete on price or risk further deposit losses.

For now, savers appear to be voting with their feet. The combination of poor rates, rising competition, and the convenience of online banking has triggered a migration on a scale not seen in decades. If the trend continues, the UK’s financial landscape could soon be dominated by a new breed of bank – leaner, faster, and far more willing to reward customers for their loyalty.