Recent consolidation among smaller, “challenger” banks in the U.K. highlights how difficult it is to compete with large, incumbent players in a mature retail banking market, Moody’s Ratings says.
In a new report, the rating agency said that several smaller lenders in the U.K., which tried to take on the Big Five banks — Lloyds Banking Group plc, NatWest Group plc, Barclays PLC, HSBC Holdings plc, and Nationwide Building Society — have recently exited the market amid weak performance.
“Consolidation between mid-tier banks accelerated in 2024 and early 2025,” it said. A couple of these upstarts were acquired by rival building societies and another sold off its mortgage and personal loan portfolios to convert into a boutique small business bank.
“Their departure … demonstrates how difficult it is for lenders with limited scale and pricing power to operate sustainably in the U.K. retail banking market,” amid high regulatory and technology costs, the report said.
Similarly, the competitive threat posed by various fintech banks “remains limited,” it noted, as these players often function as secondary providers for small transactions, rather than displacing primary banking relationships.
At the same time, the Basel III capital rules have pushed the large banks to focus on their more stable revenue sources, and improve risk management, Moody’s noted.
The consolidation trend is expected to continue among mid-tier banks amid their continued weak profitability, high tech and regulatory costs, and the fact that many are owned by private equity firms, it said.
Further consolidation “would further reduce competitive pressure on the Big Five, reinforcing their dominance,” the report said.
Certain Big Five banks, such as Barclays and NatWest, could be buyers of these smaller players, although the potential scrutiny from competition regulators could discourage some of that interest, Moody’s said.