For many of the generation who came of age in the late noughties, earning good interest from savings accounts was until recently an unknown concept familiar only in the stories of their parents and grandparents.
In the decade between August 2012 and November 2022, the average easy access rate did not surpass 1 per cent, according to data provider Moneyfacts.
“People had forgotten they used to get paid for having savings,” says Richard Davies, chief executive of challenger bank Allica. “For a decade you couldn’t really get paid [interest].”
Over the past year, that has changed rapidly. As lockdowns lifted, the Bank of England — like other central banks — drove rates up rapidly, reaching 5.25 per cent in August, as it sought to battle persistent inflation.
In response, lenders — led by challenger banks — have pushed up the interest rates they offer savers. The average instant access account is now 3.28 per cent, while a one-year term account is 5.36 per cent.
“Thirteen years ago, you were lucky to get 0.5 per cent on an easy access account,” says Ravi Kumar, senior manager at sharia-compliant challenger Gatehouse Bank. “Now you look today, you can get more than 5 per cent. For every £1,000, that’s £50 back in your account compared to £5.”
For a new generation of challenger banks looking to wrestle market share from slow-moving incumbents, the chance to offer higher savings rates gave them an opportunity to stand out — one which could offer significant benefits to savers.
There is evidence that some have taken advantage of this. But industry data, analysts and even the challenger banks themselves say that the overall impact on the deposit market has so far fallen short of what might have been hoped. Deposits at the big banks remain sticky.
“It’s high street banks exploiting inertia,” says Davies. “[They] will claim they’ve got great rates on a few products if customers look for them, but it’s not what a lot of customers wake up and think about.”
FT Money explores whether the rebirth of competition in savings deals can lead to changes to the long-established structure of UK banking.
Pandemic and the cost of living
Just as the amount that customers make on savings has varied wildly in recent years, data from the Office for National Statistics shows that over 70 years, there have been considerable peaks and troughs.
The biggest single impact on increased savings was the coronavirus pandemic. The average over the period is 8.4 per cent, but in the second quarter of 2020 the amount saved spiked by more than 20 percentage points to 27.4 per cent as lockdowns were imposed, travel was halted and opportunities to spend were curtailed.
Figures from the Bank of England also show that the kind of accounts that people have been putting their money into has changed over time. In the uncertainty of the pandemic in early 2020, inflows into both instant access and current accounts soared. From late 2022, fixed-term accounts were the main beneficiaries.
“You’ve seen the allocation of deposits to term product grow substantially during 2023,” says John Cronin, an analyst at investment bank Goodbody. “With the rising rate cycle, some savers have been willing to hold out for longer.”
He points to NatWest’s third-quarter results, where 15 per cent of its deposits are now in term accounts, up from 11 per cent at the end of June.
Kumar at Gatehouse said that this mirrored behaviour the challenger bank had seen among its customers.
“Previously, literally everybody was putting money into an instant access or maybe a bit in a one-year fixed-term account,” he says. “We’ve seen a new cultural behaviour of staircasing, taking savings deposits and splitting them across various different terms.”
Research by Gatehouse estimated that about 14mn people in the UK now consider savings to be an essential outgoing, alongside costs such as fuel and other bills, in spite of the tough state of the economy.
The study also found evidence of a generational gap in savings, but said young people with family and friends who were saving were more likely to do the same.
“With 18 to 24-year-olds, we found that they said they were influenced by friends and families — they’re ready to learn from those close to them,” Kumar says.
In a low interest rate world, banks struggled to increase their net interest margin — the difference between what they pay for savings and charge when lending. As the rate has risen, it has become possible again for banks to make money on the gap between the two.
That has been particularly promising for digital challengers including Monzo, Starling and Chase UK (JPMorgan’s international offering) on the consumer side and SME-focused players, such as Allica.
These banks, which supplanted earlier “challengers”, such as Virgin Money and TSB, have proved particularly popular with younger users — a survey from Monzo in the US last year found most customers were aged between 25 and 34.
Financial Conduct Authority (FCA) data shows the gulf in rates which has emerged over the course of a year. In January 2022, the median instant access rate for the largest banks was close to the base rate of 0.25 per cent, with challenger banks offering 0.4 per cent. By July 2023, when the base rate had reached 5 per cent, digital challengers were offering an average of 3.7 per cent on the same accounts, compared with 2 per cent at major banks.
Savvy shoppers can find even higher rates today. Monzo offers 4.1 per cent on its regular savings account, a rate matched by Chase UK, JPMorgan’s international offering. The latter, which launched in September 2021, reached £15bn in deposits by May.
“You saw record flows over the past 12 months into challenger banks offering high interest accounts,” says Davies at Allica, who added that other beneficiaries included platforms such as Flagstone, which allow customers to spread their money in accounts at a number of banks to get the best rate.
Data on market share puts this in a different light, however. Between January 2022 and March 2023, the nine biggest lenders — which includes Lloyds, HSBC, NatWest and Barclays, alongside Nationwide, TSB, Virgin Money and the Co-operative Bank — increased their savings market share from 48.3 per cent to 49.7 per cent, according to the FCA’s cash savings market review in July. Digital challengers, by contrast, grew their share from 3.7 per cent to just 3.9 per cent.
There nonetheless remain opportunities for challengers. Research carried out by Allica, a bank focused on small and medium-sized businesses, estimated that small businesses are losing out on more than £7.5bn in interest every year based on the amount sitting in non-interest earning current accounts or in savings products which offer lower rates than large businesses.
Cronin at Goodbody said that for challengers, picking up retail deposits was particularly valuable as a replacement for the Term Funding scheme for Small and Medium-sized Enterprises (TFSME). The measure, first launched in 2016, was reintroduced by the BoE in 2020 to provide funding at costs close to the base rate and ensure small businesses did not collapse.
With repayments for TFSME due to begin from next year, finding a new source of funding to replace it is vital. While big lenders are flush with deposits in current accounts, which cost little as they offer no interest, these make up a much lower proportion of the mix held by challenger banks, says Cronin.
That makes savings accounts important for them, especially in a rising rate environment where wholesale funding costs are far higher than even a year ago.
Political pressure
Rivals are not the only ones to accuse big banks of failing to offer decent market rates. Consumer rights groups have also been critical of the rates offered by incumbent players given the impact of persistent inflation.
Although the BoE held rates stable this week — a sign it does not believe further hikes are needed to tackle rising costs — there is still evidence that inflation remains unhelpfully strong.
“In the midst of the worst cost of living in decades, it’s crucial that those who can afford to put money aside are getting good returns,” says Jenny Ross, editor of Which? Money. “However, that’s been made much more difficult by some high street banks offering meagre returns.”
She said that research from Which? estimated that poor rates could leave loyal customers who stick with their traditional banks short-changed by hundreds of pounds a year.
Politicians and regulators have been paying increasingly close attention. That includes the FCA, which this year introduced a new Consumer Duty requiring firms to show that they are delivering fair value. In July, it called the chief executives of the UK’s largest banks and building societies to tell them that it wanted “to see that progress [on savings rate increases] accelerate”.
Lenders initially said they were unable to tell savers who had opted out of marketing communications about better deals. A rare joint letter sent by the FCA and the Information Commissioner’s Office to the banking lobby group UK Finance disputed that argument.
Later that month, it released a 14-point “action plan” on cash savings, which included requiring those companies which offered the lowest rates to justify why they were not more competitive.
“The regulator has made clear that this behaviour will no longer be tolerated, and firms that continue to fail to offer fair value to customers should expect to face tough consequences,” says Ross.
MPs on the powerful Treasury select committee have also criticised senior bank executives, hauling them in to question their responsiveness on savings rates, drawing a comparison with the speed at which they increased mortgage rates.
“The big four banks have been far too slow to reward savers through better rates on instant access savings accounts,” says Harriett Baldwin, the committee’s chair. “They should have listened to our suggestion as there are signs that savvy consumers are switching for better rates elsewhere.”
“We will continue to press for individual and business savers to be rewarded,” she added. “Meanwhile, savers should shop around for the best rate.”
A fading challenge?
Yet in spite of this, even challenger banks admit that the amount of deposits they have secured is only a fraction — around 4 per cent — of the overall market.
Compared with the third quarter of 2019, deposits at the four biggest banks have increased by about £220bn. Both NatWest and Lloyds reported net inflows in the third quarter in the past couple of weeks, although Barclays UK continued to see a decline.
Analysts say this is at least in part a result of political pressure on the biggest players. “Back in the early part of the year when pressure started to mount from the Treasury select committee, you saw large banks increase their rates,” says Cronin.
And with rates at or very close to their peak, he said, further deposit moves are not expected to take place in the next few months, short of a major economic change.
BoE data suggests that the impact of the cost of living crisis is beginning to reverse the trend of late 2022, when people increasingly moved into fixed-term savings accounts.
Growth in fixed term deposits is slowing, as is the amount leaving instant access or current accounts. In August 2023, outflows from the latter totalled more than £12bn while £8bn went into fixed term deposits. As of September, the instant access outflows were down to £9bn, while fixed inflows were just £5.3bn.
Cronin ascribes that in part to the macroeconomic backdrop and impact of higher prices on households’ ability to put money into term deposits.
“There’s a danger that slips back a bit as people need the money to spend, which constrains the overall growth of deposit balances,” he said.
Gary Greenwood, an analyst at Shore Capital, highlights the non-bank players adding to competition in the market. Most notable among them was National Savings & Investments, the state-owned savings bank, which raised the interest rate on its one-year fixed bond from 5 per cent to 6.2 per cent in August.
It received £7.7bn in net inflows in September, the highest level in more than three years, and an increase of more than £7bn on August. The bond was later withdrawn.
Digital challengers may hope that this is a generational issue, given their greater appeal to younger users than traditional banks. But data from the current account switching service run by payments operator Pay.UK shows that NatWest and HSBC have seen the highest influx of customers. As 75 per cent of people keep savings with their current account provider, challengers may have to wait for that broader switch before they can make real inroads into the big lenders’ domain.
Executives at challenger banks also argue that incumbent players are taking advantage of customers’ unwillingness to go through the hassle of moving their savings.
“Why do people leave money on deposit in a current account or in an easy access account which is going them one and a bit per cent? There’s a term — lazy savers — some people can’t be bothered,” says one. “They’re just not worrying about the rate of interest they’ve got.”
Another is more sanguine about the outlook for disrupters.
“You’ve seen challengers coming in, raising good amounts of deposits and giving better terms for savers — but you still have larger amounts sitting in the clearing banks where people are very inert,” the person says. “Both things can be true because is the market is so deep.”
