The report shows that Challengers continue to grow in a shrinking market, with lending assets increasing by 31.5% compared to a decline of 4.9% for the Big Five UK retail banks: Barclays, HSBC, Lloyd’s Banking Group, Royal Bank of Scotland and Santander.
For many of the Challengers, this growth has also resulted in improvements in profitability. Total profits for the Challengers increased by £194m against a drop of £5.6bn for the Big Five.
As many Challengers adopt distribution models that do not utilise a branch network, they have significantly lower costs across their customer and channel functions. These typically run at 6% of their overall cost base, compared to an average of 27% across the retail banking industry.
Additionally, KPMG says the scale benefits that should be gained by the Big Five have been partly eroded by unwieldy legacy IT systems, compliance issues, regulatory change and costly real estate.
However the report says that "despite their innovations and attractive propositions, Digitally Focused Challengers face a number of obstacles", including changes in the buy-to-let sector which may hinder future profitability, and customer inertia.
The data shows that Challenger banks offer consistently higher savings rates, which KPMG says is "great news for customers but expensive for the Challengers". It asked whether customers of the Big Five are forgoing interest because of inertia, or some other perceived value such as the brand and/or the reassurance and convenience of a branch network.
The report expanded:
"The biggest winner in switching has been Santander, with its 1-2-3 product, although whether the recent tariff increase will change this remains to be seen. So Challengers will have to do more than just get a share of the switching market to be successful – they will need to create a market."
However KPMG's global Co-lead for Fintech, Warren Mead, said that "if these new kids can successfully combat customer inertia, at scale they could blow the incumbents out of the water.”
Jon Hall, Managing Director of Masthaven Bank, commented:
“Personalisation and digital experience are, we believe, key cornerstones of a modern challenger bank – but they need to be centred around the customer, as enablers to help them better manage their money. Only then do they start to disrupt a marketplace and redefine banking as we know it. As the first challenger bank to receive authorisation in 2016, we are focused on building products that customers can tailor to suit their lifestyles – for too long banks have dictated the terms, true personalisation will enable the customer to control the terms.”
