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How challenger and specialist banks can grow amid headwinds

Authors

  • David Sack

    EY UK Challenger and specialist banks, Business Development Director

  • Ian Cosgrove

    EY UK Head of Challenger and specialist banks

5 minute read 11 Jul 2025
Related topics
Financial services
Banking and capital markets

The UK’s challenger, specialist and digital banks demonstrated resilience last year, but should seize opportunities to enhance performance.

In brief

  • The challenger, specialist and digital banks delivered a robust performance in 2024, reflecting their strengths amid a challenging marketplace.
  • Despite the headwinds in 2025, there are opportunities for the banking sector driven by advances in technology, and potentially, consolidation.
  • Optimising costs and managing capital remain priorities for UK digital banks and the rest of the segment, which can be informed by our industry dashboard.  

Despite a challenging environment, the UK’s challenger, specialist and digital banks delivered a resilient performance in 2024. To assess their performance, we used our EY challenger and specialist banks database, which serves as a readily available and detailed resource for industry analysis.1 

This database powers a dynamic dashboard which is regularly updated, providing key industry data within the segment of small and mid-tier banks, including financial performance indicators. 

It allows executives, analysts and other stakeholders to view trends across numerous metrics and isolate the performance of the challenger, specialist and digital segments, using data from the financial disclosures of 53 banks spanning the past decade. Because most of these banks are not publicly listed on the stock market, the database offers particularly insightful perspectives.

Make informed decisions with the EY challenger and specialist banks database

 

Our database allows users to analyse the performance of over 50 individual banks and compare them against each other.

This database is best experienced on a desktop device.

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The key trends from full-year results

Our analysis using the dashboard highlighted the following seven trends in challenger, specialist and digital banks’ 2024 annual results.2

The headwinds of 2025

Although the challenger, specialist and digital banks each face their own particular challenges and opportunities, there are also broader headwinds this year.

Whilst many banks had a stronger second half in 2024, loan growth in 2025 may be impeded by economic and geopolitical uncertainty, and lower growth, with UK GDP forecast to rise by 0.8%.3  

However, we expect them to have delivered reasonable growth so far this year, given that publicly listed banks on the stock market across Europe, including the UK, reported stronger than expected results for the first quarter.4

There is also the challenge for banks to effectively modernise their technology stacks, evolve their digital customer propositions, implement AI and improve operational resilience. For example, implementing technology brings change-related risks — both in execution and in downstream impacts on customers. Regulators are increasingly focussed on how these risks are identified and managed, with appropriate second- and third-line oversight and review.

In addition, there is also the wider issue of the Financial Conduct Authority’s ongoing comprehensive review of motor finance commission practices in the UK financial services industry.5 Certain banks in the segment may have exposure to the issue of motor finance redress. Whilst it is too soon to speculate on the likely outcomes, external estimates suggest that in total this could cost the financial services industry up to £30b.6

 

How EY can help

  • Banking & capital markets

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Seizing opportunities for business growth 

 

Whilst the banking sector may face challenges, 2025 still presents opportunities for banks to seize, including longer-term, strategic advantages. We know that a number of banks are exploring tactical and strategic changes to improve financial returns and customer experiences. What should UK digital banks, challenger banks and specialist banks consider to enhance performance? We suggest three key actions:

 

1. Transform: Strengthen operational resilience through innovation

Transformation is often underpinned by new technologies and the adoption of automation capabilities and should be a key focus this year. The purpose of these programmes is to improve customer experience, enhance workforce efficiency and productivity, and ultimately to reduce costs. This can be achieved through a number of tactical changes, including off-shoring and outsourcing capabilities, simplifying and automating processes, or by changing operating models to refocus the workforce.  

 

2. Optimise: Continue to improve capital positions

This may be possible through the use of either strategic or tactical changes to business models. Options include enhanced risk management practices or securitisation strategies, both of which help optimise balance sheets. These measures can allow banks to unlock capital for growth whilst improving shareholder returns.

 

3. Acquire: Explore the potential for M&A

Strategic mergers and acquisitions (M&A) are becoming increasingly attractive to shareholders and leadership teams as a way to enhance competitive positions by acquiring digital capabilities and routes to market and to achieve economies of scale amid rising operational costs. We believe M&A across this segment is poised to accelerate, once we have some economic and geopolitical stability and as the pricing gap begins to close.

Summary

The challenger, specialist and digital banks remain key disruptors in financial services and contributors to UK economic growth. Our analysis shows that it recovered well after the disruption from the pandemic, the volatile geopolitical environment and an unstable economic landscape with high inflation and rising interest rates. Although there are headwinds in 2025, there are also opportunities to seize the benefits of new technology to lower costs, increase revenue and enhance profitability. Furthermore, investors seem to be recognising the long-term advantages of these strategies.


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    About this article

    Authors

    • David Sack
      EY UK Challenger and specialist banks, Business Development Director
    • Ian Cosgrove
      EY UK Head of Challenger and specialist banks
    Related topics
    Financial services
    Banking and capital markets

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.