6 minute read 27 Jan 2020
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What the UK Challenger & Specialist bank market can look forward to in 2020

By Ian Cosgrove

EY UK Head of Challenger & Specialist banks

Passionate about helping Challenger & Specialist banks transform the UK banking market. Strategic thinker and relationship builder. Irish rugby fan.

6 minute read 27 Jan 2020

2020 will see Brexit and a US presidential election – but what does it have in store for the UK’s Challenger & Specialist banking sector?

What does 2020 hold in store for the UK’s Challenger & Specialist banking sector? Below are some thoughts on the key drivers and potential outcomes. I’m not so bold as to call these predictions – they’re more conversation starting points that we’d be delighted to discuss.

Market drivers


Whilst many uncertainties remain, the outlook for the UK economy has improved over the last three months, with the decisive nature of the General Election result and the resulting clarity on the first stage of Brexit expected to provide a short-term boost to economic activity. The EY ITEM Club’s Winter Forecast  has increased its projection for GDP growth to 1.2% in 2020 and 1.7% in 2021, compared to the 1% and 1.5% predicted in its last quarterly previous forecast.

Credit conditions

The EY ITEM Club outlook for financial services, published in December 2019, forecasts growth in the stock of lending for 2020 as follows: mortgages (3.7%), consumer credit (2.8%), business loans (2.1%).

However, since its publication, markets have been surprised by the scale of the Conservative majority in parliament. Whilst much macro uncertainty remains, it does give more clarity on Brexit and the direction of other government policy than we’ve had for some time. Perhaps this will continue to stimulate increased confidence among consumers and small and medium-sized enterprises (SMEs), beyond the immediate boost we’ve seen to date? There were also several pledges in the Conservative election manifesto around infrastructure investment and support for SMEs which, if implemented, could also boost confidence and demand for credit.

Business lending


The percentage EY ITEM Club forecasts growth in business lending


Surplus liquidity squeezing mortgage market margins was a major talking point during 2019. Even in the final weeks of the year lenders were still announcing rate cuts. Whilst some could still cut further, perhaps we see this bottoming out in 2020? Nonetheless, given the level of competition in the mainstream mortgage market, Challengers are planning to increase the mix of SME and unsecured lending in their books, competing more with Specialists. Furthermore, the ideas formed during the Alternative Remedies process of 2019 will begin to be rolled out into the SME market in 2020 – and not just by the winners, but also by the unsuccessful applicants who still back their ideas.

Potentially offsetting this however, could be a continued reduction in new entrants to the market. 2019 saw only two new bank authorisations. Whilst that number could increase during 2020, it feels a stretch to see the levels hitting those of several years ago. Another release valve for the pressure of increased competition will no doubt involve a continuation of the consolidation and market exits we saw through 2019.

Of course, competition in the lending markets is only part of the story. We believe we will see increasing competition in the savings markets going forward. The unwind of the Term Funding Scheme (TFS) will have some impact, but we think this will more be driven by firms pulling the interest cost lever to help better manage Net Interest Margin (NIM) compression, and will be writing more about this in the coming months.

Watch out for increasing competition in the savings markets going forward.


Both consumers and SMEs will undoubtedly continue to want services provided faster and easier. But if confidence improves, could they be willing to pay a premium for superior service? At least until such levels of service becomes standard. Of course the flip side of this is that customer expectations will only continue to increase, and they will more likely vote with their feet around issues such as IT outages.

Continuing demographic shifts such as an aging population, the renting generation and inter-generational lending will continue to shape new market opportunities for specialist propositions addressing these needs.

Will we see open banking driven propositions gain more traction amongst UK consumers and SMEs?


On the Prudential Regulatory Authority (PRA) agenda, banks will be busy working on regulatory reporting, operational resilience, a continued follow through on the fast growing firms review, and beginning to focus on climate change risk.

The impact of the Financial Conduct Authority (FCA) agenda could be higher than last year – for example, the impact of new regulation in peer to peer (P2P) and auto markets, and a continued focus on high cost credit. The activity of Claims Management Companies will also be one to watch as they search for business to replace the loss of income from Payment Protection Insurance (PPI) miselling.

Then as the 2021 expiration date for LIBOR looms ever closer, we expect to see market solutions begin to emerge.

We expect Challenger & Specialist banks to continue being vocal around the challenges to growth emanating from policy action such as internal ratings-based (IRB) accreditation, minimum requirement for own funds and eligible liabilities (MREL),  the bank corporation tax surcharge and regulatory coordination (we were proud to support the response by UK Finance to HM Treasury’s call for evidence regarding regulatory coordination in October 2019).

We expect Challenger & Specialist banks to continue being vocal around the challenges to growth emanating from policy action such as IRB accreditation, MREL, and the bank corporation tax surcharge.

Potential outcomes

I said I wouldn’t make any predictions, but I’ll suggest a few potential outcomes from the above drivers that we may see in 2020.

  • Whilst our EY ITEM Club base case is relatively muted, perhaps increased confidence, translating into more activity and credit demand, should give a marginally more positive trading environment than 2019, allowing Challenger & Specialist banks more room to respond to the drivers above
  • The response to increased competition will mean new products and proposition launches, a continued low rate of new bank authorisations, consolidation and market exits, and an increasing focus on cost as growth becomes harder to achieve
  • Customer demands, competition, the need to focus on cost, the burden of regulatory compliance – all mean an increased need to adopt new technologies – or risk being left behind
  • Budgets will be challenged due to high mandatory spend on the regulatory agenda, but investment budget can be increased by reducing operating costs
  • For those that don’t or can’t respond, there will be the odd failure or exit, but these will be driven by intense competition rather than credit stress
  • 2020 could mark a tipping point for some B2C FinTechs, with others left behind unable to achieve scale. The P2P market is also likely to shrink rapidly to those with scale, with the rest becoming purely wholesale funded specialist lenders, or exiting the market
  • To respond to both challenges and opportunities, we will see an increasing level of collaboration, alliances and partnerships creating an increasingly complex ecosystem

Other things to watch out for

  • Repercussions from any Alternative Remedies Package public commitments not being met
  • Big tech entering the UK market
  • What Marcus plans to do with its £11bn of deposits
  • Electric vehicle adoption and its impact on the motor market
  • Sustainable finance and climate change risk becoming big agenda items
  • How to attract/retain a high performing, diverse workforce bought into your purpose and values and motivated to achieve success


Increasing confidence, translating into further activity and credit demand, should give an improved trading environment for Challenger & Specialist banks. This allows for more room to respond to the competitive and regulatory challenges they face in 2020.

About this article

By Ian Cosgrove

EY UK Head of Challenger & Specialist banks

Passionate about helping Challenger & Specialist banks transform the UK banking market. Strategic thinker and relationship builder. Irish rugby fan.