Challenger banks have reached an "inflection point" after loan growth across the industry halved in the last year, a fresh report has warned. New analysis from Big Four firm EY showed lending growth across UK challenger, specialist and digital banks slowed to 4.5 per cent in 2025, down from 8.9 per cent. This came as deposit growth simultaneously took a hit to 6.7 per cent from 12.3 per cent previously.
The report pointed to customers prioritising debt repayment over new loans in the face of macroeconomic uncertainty. Still, the average net interest margin – a key indicator of a bank's profitability from lending – rose to 2.9 per cent from 2.7 per cent. Simultaneously, the industry took a more prudent approach to cost-cutting, with cost-to-income dropping to 58.2 per cent from 65 per cent, in a sign challengers were finding cheaper ways to generate more revenue. These factors filtered through into a modest bump to pre-tax profit growth, which hit 0.5 per cent.
EY Commentary on Sector Maturity
Dan Cooper, head of banking at EY UK, said loan growth was "harder to come by in 2025" but challengers were "continuing to trade well". "There are signs the sector is reaching a new level of maturity with stronger profit margins, and improved efficiencies." But Cooper warned the UK's "challenger and specialist cohort of banks are at an inflection point" with the firms that debuted just a decade ago now operating in a "very different landscape".
Challengers Fight to Gain and Defend Market Share
The likes of Monzo, Starling and Revolut landed on the UK banking shores over 10 years ago and rattled the incumbents as they sought to claw their own market share. But now those firms face similar issues in consolidating their market in a new age. Figures from Pay.UK showed Monzo lost one current account switcher for every two it gained in 2025 whilst Starling was hit with a net loss of 8,433 for the year after suffering more switching outflows than inflows in every single quarter of 2025.
Ian Cosgrove, head of challenger and specialist banks at EY UK, said the latest data represented a "longer-term recalibration" across the sector. "Initially established to disrupt the mainstream lending market, many challengers have since evolved, either by being acquired by larger incumbents or shifting into more defined niches such as commercial lending and specialist mortgages."
The industry's bigger players have snapped up disruptors in the last few years in a bid to cement their market share. Barclays bought Tesco's banking arm in 2024 for £600m and Natwest acquired the core banking business of Sainsbury's Bank in 2024, taking the firms roughly 1m accounts under the Natwest umbrella. Cosgrove said it is becoming "harder to sustain by volume alone" leading to many of the industry's younger banks "pursuing new routes to scale through targeted M&A, diversification and consolidation".
Regulatory Challenges
Challengers have stepped up efforts for improved regulation in the last year. A report published under the fintech industry body Innovate Finance took aim at the banking watchdog "undermining the homegrown British banking success story" through overly burdensome regulation. The report accused the UK's regulatory structure "unintentionally favours large, established incumbents, hindering the very competition the UK regulatory system was designed to foster".
