The new annual report, The Game Changers, analyses the full-year results of some of the largest UK challenger banks, grouped in three categories – the ‘Large Challengers’, ‘Small Challengers’ and ‘Retailer-owned’ banks.
The report makes reference to the 2014 results of the UK headquartered banks grouped as follows:
- ‘Big 5’ banks: Barclays, HSBC, Lloyds, Royal Bank of Scotland (RBS) and Santander.
- Large Challengers: BoI UK (Post Office), National Australia Bank (NAB), TSB and Virgin Money.
- Small Challengers: Aldermore Group, Handelsbanken, Metro Bank, OneSavings Bank, Shawbrook Group and Secure Trust Bank.
- Retailer-owned banks: Asda Money, M&S Bank, Tesco Bank and Sainsbury’s Bank.
The report reveals that while Small Challenger banks are securing stellar returns, key financial indicators of the Large Challengers such as the return on equity, are becoming very similar to the ‘Big Five’ – Barclays, HSBC, Lloyds, RBS and Santander.
Warren Mead, head of challenger banking and alternative finance at KPMG, said “Although the overall challenger banking sector is growing rapidly and securing greater returns, it is the Small Challengers who are driving its growth.
“Small Challengers are securing high returns and have better cost optimisation. If this trend were to continue, as the challengers grow and benefit from economies of scale, it poses an interesting question for the Big Five as to whether too big to fail, becomes too big to compete?
“Digital banking is a great example. Our report found that the mobile functionality of the challengers is at best equal to, but often worse than, the ‘Big Five’. For those challengers focusing on customer service or cost as a differentiator, this could be a major hurdle for the future.”
These figures paint a picture of the challenger banks picking-up the whitespace left behind following the financial crisis. This includes areas such as small business lending, second charge mortgages, invoice financing and unsecured lending.