Navigating an ever changing savings landscape

28/06/2017

This week sees two quite notable birthday’s in the savings market.  Today marked the 2nd anniversary of the launch of RCI Bank in the UK.  Owned by the French car manufacturer Renault, RCI has been a bastion in the best buy tables, particularly for savers looking for access to their money.  In their first 18 months, the bank notched up an impressive 60,000 customers and £2.1bn of savings.  Without RCI’s appetite, I have no doubt that savers would have seen even lower rates for accounts with easy access.  Their competition has helped provide some level of return in the market.

The second birthday of note arrives next week where the 5th July marks the 10 year anniversary of the recent nadir of the Bank of England Base Rate.  That day saw base rate rise to 5.75% and is the last time we have seen the Monetary Policy Committee raise interest rates.  The rest, as they say, is history.  The stark reality of this though is we now have our first generation of savers who have known nothing but a low rate market and, for most part, a falling one during that time.

To mark their birthday, RCI commissioned research on the savings market from Opinion Research, highly respected journalist Simon Reed and consumer advice website Savings Champion.  They also invited a number of market commentators (including myself) and personal financial journalists along to examine the results, to look at what the future may hold for savers and to discuss what needs to change to improve the market.

The key highlights of the research to me were the average savings balance was found to be £11,260 with average monthly savings being £239, which is down 14% on last year. 32% have never switched savings provider, 29% haven’t taken any action in 5 years and only 12% have moved in the past year.  43% have moved for better interest rates and 23% for customer service.

So, despite over 30 new providers entering the market in the past decade, there’s still huge inertia in the market.  There are a number of reasons for this.  Firstly, the actual incentive to change is deemed not worth it for far too many.  On the average balance from the RCI research, gaining another 0.5% on interest rates from switching only nets another £50 a year in interest.  For most people, this isn’t enough even in the climate of 5 minute online applications which can be funded there and then.  Secondly, the low rate climate has encourage a significant group of consumers who see no point in savings in a low rate environment or who have searched for riskier but higher return options.  Particularly for young people, the sums needed for a house deposit are so astronomical they see no point in scrimping and sacrificing while watching that first house purchase become even more unobtainable.  Thirdly, the volume of choice is so great that many savers are put off as there is such a range of products and providers, coupled with a lack of advice and education that doing nothing is less daunting for some than taking action.

What needs to change for the future?  A switching service, like that which exists for current accounts was something discussed that seemed to have merit.  Better education for consumers and more tools to help was also suggested.  A number of the next wave of new banking entrants are certainly moving in this direction and there’s a number of financial management tools coming which will help.  PSD2, which will open up access to more financial data, will also help this.  There’s also a role for journalists and financial commentators to help here as well as parents – some estimates suggest we have our attitude to money engrained in us as early as 7 years old!

Personally, my hope is that consumer behaviour will change.  Culturally, if we have a bad meal in a restaurant, we take our business elsewhere and often take to social media or Trip Advisor to tell everyone else.  However, if we get derisory savings rates and poor service, 8/10 of us take it on the chin.  I’d like to see more customers treat banks like restaurants!  Will it happen in the next decade?  Who knows!  The only thing I know is that it is going to be fascinating to see how the market plays out.