Scotland’s savers set to benefit as competition for funding grows among challenger banks

Sam Subesinghe
Sam Subesinghe

Scotland’s savings pots could be in for a boost as the country’s smaller challenger banks consolidate and innovate in an increasingly competitive marketplace, according to KPMG UK. 

In its latest report, Challenger Banks: Opportunities and Challenges, KPMG has predicted the number of banking players in Scotland will remain relatively static over the next 12 months, with a number of potential new entrants to the market offset by mergers and tie-ups. 

Recent examples of consolidation include the acquisition of Virgin Money by CYBG, leading to speculation over the scale and future of both banks’ Scottish headquarters in Glasgow and Edinburgh. Meanwhile, German mobile bank N26 has entered the UK market, with significant global growth ambitions, including expansion into North America. 

Since the financial crisis, UK challenger banking has flourished. But, despite their growth, they have made relatively modest impacts on the UK savings market. Most new entrants have quite vanilla products such as fixed term accounts while many of the challengers have not yet entered the instant access savings market which represents around 55% of UK deposits. But, that is set to change. 

KPMG believes significant change and disruption in the marketplace could provide an opportunity for savers, with both established and new brands forced to look beyond digital as a selling point, and create more attractive products to build their customer bases. 

Fixed term accounts have been the mainstay of challenger bank product offerings, but changes including the closure of two prominent Bank of England funding schemes – The Term Funding Scheme (TFS) and Funding for Lending Scheme (FLS) – could force challengers to radically rethink their market offering. The schemes were designed to pass on interest rate cut savings to small businesses and individuals, and provided a platform for growth for new entrants in the financial market. Their removal means challenger banks will now be forced to find alternative sources of funding, and are expected to move into the lucrative instant access savings market, which represents around 55% of UK deposits. 

Sam Subesinghe, Head of Financial Services Consulting in Scotland, at KPMG UK, said: 

“Challenger banks come in many shapes and sizes but as a number of forces take hold – the end of cheap funding, ring fencing and Brexit– I expect to see increased competition in the UK savings market. 

“Banks who have heavily utilised the Bank of England funding schemes and retail best-buy tables will need to explore new avenues to manage their funding costs. For many of these, instant access savings could prove a low hanging fruit. Some of the digital banks will continue to attract customers through savvy technology offerings, but specialist lenders simply won’t have the customer focused technology to do that, they will have to compete on rates. That will be great news for UK savers, but it is clear that taking market share off the big banks will be an uphill struggle for our newer, smaller banks.” 

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