On the subject of banks…
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I have spent a considerable amount of time giving various savings tips here recently and most of these have revolved around either minimising spending or borrowing sensibly to ensure that you get the best deals. I have only very briefly touched upon the subject of banking so I shall explore this further here.
It is interesting to note that only nine of the 64 ‘Best Buy’ savings accounts, loans and credit cards picked by the Which? Money team so far this year have come from the UK’s big five banking groups.
Yet Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest continue to control the day-to-day finances of a huge proportion of the population. Data from market researchers Mintel shows that 65% of the UK’s credit cards are run by the big five, and they also manage 53% of savings accounts, 50 % of personal loans and 45% of Isas.
The big five banks control 79% of UK current accounts, yet pay the bulk of their customers a measly 0.1% credit interest compared with the market average of 1.78%. They also tend to have higher-than-average interest rates on their overdrafts, both authorised and unauthorised. If you keep funds in your current account or go overdrawn each month, switching from one of the main banks is a good idea. The current market ‘Best Buys’ are Cahoot (3.65% credit interest) and Intelligence Finance (2.75%). If you keep an average balance of £1,500 in your current account, you could be £53 a year better off with Cahoot (paying 3.65%) than with one of the big five banks paying 0.1 per cent interest.
Several current accounts offered by the big five banks do offer attractive levels of credit interest, but these stipulate that a minimum amount must be paid into the account each month. Two examples are the Halifax High Interest account and the Lloyds TSB Classic Plus account, which have credit interest rates of 6.17% and 4.25% respectively. However, to get these rates you will need to pay in at least £1,000 a month.
If you have money in an easy-access savings account with one of the big five bank groups, you are simply not getting the best out of your savings. The Best Buy accounts offer much higher interest rates, even if you have only a relatively small amount to save.
The big banks do offer slightly higher than average interest rates on savings than the market as a whole. For instance, the average rate on a deposit of £10,000 was 4.21% among the big five banks, which is 0.17% above average for the market as a whole. But this still leaves the major providers a long way behind the Best Buys, with ICICI Bank (6.41%) and Bradford & Bingley (6.40%) offering far better rates.
More than a quarter of the UK adult population (13m people) currently has a cash Isa. That number is likely to rise further over the next few months as the maximum amount you can invest in these tax-free accounts each year is rising next month to £3,600 (previously £3,000).
The big five banking groups offer significantly lower-than-average rates for Isa holdings of £3,000, and slightly lower rates if you have a balance of £18,000 or more.
If you want the best rates, you should switch from the big banks to a building society. The Scarborough BS currently offers the best rate in the market for balances of both £3,000 and £18,000 (6.30%), followed by Icesave and Loughborough BS (which both offer 6.10%).
It would be easier to understand why consumers stick with the big banks if they got good customer service, but all the research suggests that they often don’t. Of the 17 current account providers surveyed recently, the only `big five’ banks to appear in the top ten were RBS and Halifax. The rest filled places 12 to 16.
Banking is one area of personal finance where customers seem very reluctant to shop around to find the best deal. This should change, as not only would customers then be making the most out of their money but it would force the complacent big five to finally improve and even possibly compete on the deals they offer and the customer service they provide.
