Start-up British banks seeing better returns than larger rivals, says KPMG

New ‘challenger’ banks are outperforming the ‘Big Five’ high street banks, and the larger lenders need to examine better ways of standing out in the market, according to a report by KPMG.

The reported said that new banks in the UK are securing stellar returns, as they pick up “the whitespace left behind following the financial crisis”, which includes areas such as small business lending, second charge mortgages, invoice financing and unsecured lending.

KPMG’s report revealed that lending at the recently formed band of British banks increased by 16% last year, compared with a 2.1% drop at Britain’s big five banks - Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander.

Smaller challenger banks such as Metro and OneSavings were said to be growing at faster than larger challengers like Virgin Money and TSB.

The report also indicated that smaller challengers achieved an average return on equity – a key measure of profitability – of 18.2% last year, compared with 2.1% at larger challenger banks and 2.8% at the Big Five.

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.”

“The large challengers are looking very similar to those of the traditional banks. To ensure they remain differentiated, they must review their brand, distribution, products, culture and customer service,” added Mead.