The 海角视频 banking sector is facing a profitability hurdle that could present an "existential" turning point for the industry's challengers.
New data from KPMG indicates that the industry's average return on equity is expected to drop to eight per cent by 2027, down from 13 per cent four years earlier, as reported by .
This is predicted to trigger an £11bn decrease in pre-tax earnings, following a £3.7bn decline in sector-wide profit in 2024.
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For challenger banks, this represents both a problem and an opportunity, according to Peter Westlake, head of challenger banks and building societies at KPMG 海角视频, who spoke to City AM.
"What these newer banks lacked and what is now non-negotiable for this type of business model is scale. Without it, they struggle to deliver returns above their cost of equity. Despite strong brands and capable platforms, many are in a profitability trap," Westlake stated.
He noted that the first wave of challengers began with "admirable intentions", but most had "simply built a faster horse, digitising the traditional model rather than rethinking it."
Now, a mix of escalating costs and narrowing margins could be set to change the industry's course.
"Challenger banks, while once disruptive, now face an existential challenge: they must either adapt or face consolidation and decline."
Is the tech advantage of challengers slipping?
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As industry headwinds strengthen, analysts are forecasting a series of new deals that could lead to consolidation in the banking sector.
The 海角视频's leading six banks – HSBC, Barclays, Natwest, Lloyds, Santander and Nationwide – are anticipated to spearhead this movement.
Westlake suggested that challenger banks are at a "critical strategic fork" where they can either "bulk up" through deals, completely "reinvent their business model," or face being acquired.
In recent years, industry giants have been acquiring challenger banks.
Transactions have included Barclays' £600m acquisition of Tesco, Sainsbury's Bank paying Natwest £125m to take over its core retail banking assets, and Nationwide's monumental £2.9bn purchase of Virgin Money.
Westlake contended that the "most striking development" in recent years was the "shrinking of the digital gap" between large banks and challengers. He stated that the "competitive advantages" challengers once possessed were "no longer unique".
Other industry insiders concur.
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Speaking at the Money 20/20 conference in Amsterdam in June, Monzo boss TS Anil predicted that the next decade of banking would be a "race between two sides of the industry."
Anil suggested that legacy banks and "whether they get the tech" would compete against "fintech companies... and whether they get banking right".
The fintech chief argued that Monzo could go "toe to toe" with the incumbents but "will win with the power of technology".
Britain's banking giants have enhanced their tech capabilities as challengers have nipped at their heels.
Lenders have embraced AI wholeheartedly, with NatWest collaborating with Sam Altman's OpenAI to pursue "bank-wide simplification" and Lloyds establishing its own 'AI Centre for Excellence.'
Strategic manoeuvres
KPMG figures reveal that a substantial proportion of neobanks maintain loan-to-deposit ratios beneath 30 per cent. A reduced ratio indicates that a bank possesses ample cash from depositors whilst lending a smaller fraction, suggesting robust liquidity but potentially diminished profits.
Westlake commented: "Without a broader customer relationship such as mortgages, credit cards, business lending, they won't be able to drive the returns needed to sustain a business model."
Digital challengers have already started to accelerate their operations in pursuit of their market position and to broaden income sources.
Financial technology giant Revolut has ventured into numerous fresh markets recently, encompassing hotel reservations and mobile services. .
Meanwhile, other companies have intensified their campaigns to challenge established banks. In June, Zopa unveiled its current account "Biscuit" to compete with the likes of Lloyds, NatWest and HSBC.
Merve Ferrero, chief strategy officer at Zopa Bank, informed City AM at the time that the company would not "move like Revolut does" and would instead "go deep before we go broad".
Leading figures in the 海角视频 fintech landscape have also started examining acquisitions in an attempt to obtain a banking licence without regulatory constraints. OakNorth purchased Michigan-based Community Unity Bank in March – a company protected by the Federal Deposit Insurance Corporation.
John Cronin, banking analyst at Seapoint Insights, told City AM the transaction would "likely support the development of OakNorth's US ambitions far more quickly than applying for a national banking charter would."
Cronin noted that Revolut and Starling were now mirroring this approach with their recent interest in US acquisitions.
Starling's finance chief Declan Ferguson has stated there is a "really interesting opportunity to own and operate a regulated bank in the US".
"Starling's growth in the 海角视频 has slowed down and that is, in my view, potentially part of the reason why they are looking at overseas markets for expansion purposes," Cronin said.
He noted Engine – the fintech's banking-as-a-service offering – maintained an international emphasis, establishing "strategic congruence there too."
A fresh path forward
The achievement of the challengers has previously been gauged by the volume of customers they've managed to attract from the established players.
Nevertheless, the big four are now beginning to retaliate.
During the first quarter of 2025, Nationwide topped the sector with a net increase of over 55,000 switchers.
Monzo secured second place at 8,850, whilst FTSE 100 behemoth HSBC claimed third with 5,621.
Starling recorded a net decline, with over 5,000 customers departing the fintech and merely 4,350 signing up. Westlake commented: "If you can get a similar experience from a legacy bank as you do from a challenger and also benefit from its lending range, service stability, and cross-product scale, then the case for switching weakens."
However, he noted that the emerging landscape could pose a "conundrum for competition.
"It is partly the threat of the newer digital start-ups nipping at the heels of the big banks that is pushing innovation in the sector," Westlake added.