The accountancy giant forecasts that the closure of two prominent Bank of England funding initiatives – the Term Funding Scheme and Funding for Lending Scheme – could force challenger banks in the UK to “radically rethink” their offerings in order to secure investment.
This has the potential to deliver better deals for consumers, according to KPMG’s Challenger Banks: Opportunities and Challenges report released today.
The Bank of England schemes were designed to pass on interest rate cut savings to small businesses and individuals, providing new entrants in the financial market with a platform for growth.
Their removal means challenger banks must find finance from alternative sources, with KPMG predicting the lenders will shift their focus to the lucrative instant access savings market, which represents around 55 per cent of UK deposits.
The group expects digital banks to compete by delivering innovative products, while specialist lenders will target more customer-friendly rates.
It believes that challengers will build their customer bases, ramping up the “relatively modest” impact they have had since the financial crisis. The group added that recent mergers and acquisitions activity among the big banks, such as the acquisition of Virgin Money by Glasgow-headquartered CYBG, will likely increase competition and provide further fuel for innovation among fledgling lenders.
Sam Subesinghe, head of financial services consulting in Scotland, said: “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.”