Battle for UK deposits

AS lenders face mounting pressure in retaining savings and attracting customers, the competition for deposits is becoming a growing challenge for Britain’s banks.

The pressure is expected to persist in the coming quarters, putting pressure on funding costs and prompting traditional high street banks to strengthen customer relationships.

This is a trend highlighted by Bloomberg in a recent report.

According to the newswire, deposits have emerged as the top concern among investors following the third-quarter earnings of Britain’s largest lenders, taking precedence over issues such as bank taxes, rising interest rates, inflation and artificial intelligence (AI).

“Deposits are now the number one issue on investors’ minds,” UBS Group AG analyst Jason Napier told Bloomberg.

The issue featured so prominently in earnings discussions that some analysts apologised for repeatedly raising questions about deposit trends.

The concerns are backed by the latest figures. Lloyds Banking Group Plc lost £300mil (US$403mil) in UK retail savings deposits in the three months until Sept 30.

NatWest Group Plc recorded an identical decline in its private banking and wealth management business, while deposits in Barclays Plc’s UK corporate bank fell by £2bil from the previous quarter.

HSBC Holdings Plc also highlighted growing pressure, according to Bloomberg, saying the stability of one of its key profitability measures was “offset by emerging customer and competitive pressure on deposits” in markets including the UK.

Shrinking base

Customer savings provide banks with a relatively cheap source of funding compared with borrowing from wholesale markets. Lenders use deposits to finance loans, which generate interest income.

A shrinking deposit base therefore forces them to reduce lending or turn to more expensive funding sources, potentially weighing on profitability.

The pressure is becoming more structural than temporary, according to Benjamin Toms, a UK banking analyst at RBC Capital Markets.

“Commentary from management really is that this competition is here to stay, at least in the short term,” he said in an interview with Bloomberg.

Toms attributed some of the pressure to quantitative tightening, whereby central banks reduce bond holdings accumulated during periods of low inflation. The process can drain liquidity from the financial system and put downward pressure on commercial bank deposits.

Banks are also using some of the additional income generated through structural hedges to offer more attractive savings rates and win funds from competitors.

These hedges allow lenders to lock in interest income over time, providing some protection against changes in market rates and additional room to compete for customer savings.

“The thing that is most prevalent in the market at the moment is obviously competition around deposits,” Barclays Group finance director Anna Cross said during an earnings call last month.

In search of better returns

Customer behaviour is adding to the pressure.

Higher interest rates are encouraging consumers to move towards time deposits, Bloomberg reported, citing HSBC chief financial officer Pam Kaur.

These products offer better returns in exchange for locking away savings for a fixed period, but increase funding costs for banks because lenders have to pay higher rates.

The ability to compare competing offers online has also made it easier for customers to switch providers in search of better returns.

Another factor is the growing presence of foreign lenders in the UK market, which is adding to the challenge for domestic banks.

Lloyds chief financial officer William Chalmers said the influx of non-UK lenders was contributing to structural changes in the deposit market.

“The fact that we’ve got a number of non-UK lenders in the market taking out deposits from the UK market and not recycling them as UK lending is a third point within those structural drivers,” he told Bloomberg.

Foreign-owned banks are expanding their presence in Britain, with their growing deposit bases reflecting their ability to attract local savings.

Banco Santander SA’s UK unit, for instance, reported an increase in total deposits, mainly reflecting its completed acquisition of TSB Banking Group Ltd in April.

Deposits rose by £2bil between the second and third quarters, with savings accounts accounting for a notable increase.

JPMorgan Chase & Co’s UK retail banking business also had about £26.7bil in customer account deposits at the end of last year, an increase of approximately 17% from a year earlier.

Many challengers

Established lenders are also losing ground to challenger banks, building societies and digital-only banking providers.

These players have become increasingly effective at attracting savings, particularly through competitive rates and digital banking services.

According to KPMG figures cited by Bloomberg, building societies, specialist lenders and neobanks gained £50bil in customer deposits in 2025.

The share of deposits held by high street banks fell from 85% in 2021 to 79% in 2025, according to data compiled by the consulting firm.

However, many challenger banks have yet to develop lending businesses on a scale comparable with established lenders, creating an uneven competitive landscape in which smaller players can attract savings without necessarily recycling those funds into substantial UK lending.

For Britain’s largest banks, the response is increasingly centred on securing deposits through broader and more valuable customer relationships rather than simply competing on interest rates.

NatWest chief executive officer Paul Thwaite told Bloomberg the bank was prioritising “acquiring deposits that give us relationship value and liquidity value.”

Lloyds is taking a similar approach, with Chalmers saying it would “focus deposit value on those where we have the most valuable customer relationships.”

Barclays is also looking beyond fixed-term savings products.

Cross said its “focus on deposits is not just on term deposits” but “more broadly across the relationship,” including among higher-income customers.

The strategy reflects the importance of securing a larger share of customers’ overall financial needs, rather than attracting funds through high-interest savings accounts that could be withdrawn when a rival offers a better deal.

However, banks must also contend with external pressures that could affect household savings.

Chalmers points to energy prices and inflation as additional factors, as households face higher living costs and reassess how much they can afford to put aside.