High street banks in the UK have seen their profits drop in 2024 as customers opt for alternative lenders and online banks offering both higher savings rates and more digital services.
A report into the state of the UK banking market published by KPMG found that the UK's banking sector collectively suffered a drop in pre-tax profits of £3.7bn in 2024, marking the first fall in profits since the end of the pandemic.
Meanwhile average return on equity for the sector is forecast to fall from 15% to 10% between 2023 and 2027, equivalent to an £11bn decline in annual profits, unless remedial action is taken, according to KPMG.
High street banks have been hit hardest by the declining profits as more consumers defect to challenger banks and alternative lenders - a trend that has cost incumbent institutions the equivalent of £100bn in savings.
Between 2019 and 2024, high street banks have seen their share of deposits fall from 84% to 80%. At the same time, banks have also seen their costs rise by as much as 6% in 2024.
As a consequence of the findings, the report states that cost transformation is no longer optional and AI adoption, workforce productivity, and digital process redesign should all be priorities for banks.
"Banks are facing a lower-growth, higher-cost environment that demands transformation at pace," said Peter Westlake, a partner in KPMG's UK 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.
“The winners will be those that move beyond tactical cost-cutting and proactively address oncoming market headwinds through business model transformation,” he said.