Remember when I said this was a binary mythological system, and had been for hundreds of years? That’s true. Remember how that implies that there’s nothing outside of that? Yeah, that’s not strictly the case. See, no culture is completely isolated. Even in the ancient world, cultures impinge on one another, fiercely. This is more true with England, Scotland, and Ireland than other mythological frameworks.
The Romans never fully conquered the island. Scotland and Ireland were free from Roman (and hence Christian) influence for a time. And while William the Conqueror’s invasion was complete, the Celtic and faerie stories were still around. The fact is that stamping out a culture’s stories is next to impossible. As long as there are people around to keep telling them, they’ll stick around.
There’s no such thing as a pure mythology, and the inclusion of faeries in English literature is common. There was a Gaelic revival in Ireland as the conquering Normans declined, which kickstarted almost a hundred years of stories that included faeries and magic. Mallory’s work is one of the longest of this example, but it kept going, including such great works as Edmund Spenser’s Faerie Queen and Shakesperae’s A Midsummer Night’s Dream.
So even though Mallory’s story of Arthur is fiercely Christian, the inclusion of faeries in the work doesn’t detract from that. Faeries became kind of the Velcro (like Buddhism) of the English-Christian world. Yeah, that needs explanation, in brief. Buddhism didn’t set about replacing any major religions, it just stuck itself to others, like Velcro. A person could be Hindu-Buddhist, Confucian-Buddhist, and Shinto-Buddhist without any inherent conflict. In the same way, faeries just attached to English stories without negating the other religious aspects.
Now, what’s interesting is that Mallory is the only one to really adopt them into the Arthurian story. Earlier stories, especially Geoffrey of Monmouth, don’t really take on the faerie aspects, not for Excalibur, and not Morgan le Fay, and not for Avalon. I think this is part of that Gaelic revival, which happened well after Monmouth and the others had made their contributions.