Don’t forget the Challenger

Aug 13th 2018

The past decade has seen a transformation of the banking landscape and with this, challenger banks. Insignis works with some of the smaller challenger banks that offer saving accounts that are FSCS protected.

Once signed up with Insignis, we also manage the entirety of the sign-up and continuation process for you. Insignis notifies you when better rates become available across all providers, challenger and high street, and informs you in advance of any maturing funds. We provide you with a personalised, active cash management service so you can reap returns whilst keeping your cash protected.

Challenger Banks vs. High Street name

Challenger Banks are driving a force for change within the banking sector as they offer diversification in a once oligopolistic market thanks to the relaxation of banking regulations to enable competitive growth. This diversity, and thus increased competition, leads to challenger banks offering impressive interest rates for savers.

The impact on interest rates with the recent Term Funding Scheme and other liquidity initiatives closing, will be increasingly relevant over the next few years. Challenger banks are offering higher rates than ever because of their need to build their balance sheets and are offering rates than can be up to 20 times higher than the bigger high street banks. There are now 26 challenger savings accounts that offer interest rates above the current CPI of 2.4%. This is a significant change; from July 2017 through to March 2018, there were no savings accounts that offered a real, positive interest rate .

While many turn to high street banks for financial security, challenger banks and their higher interest rates are often overlooked.  The consumer misconception here is that their money will be unsafe should they decide to save with a little-known, challenger bank and therefore, consumers are willing to sacrifice return for security. Yet, the FSCS guarantees £85,000 protection per individual per financial institution. Whilst a risk-averse consumer may be wary to use a bank they are unfamiliar with, the government-backed scheme has encouraged consumers to re-adjust their preferences in order to give challengers a fair chance to compete for business. If a challenger bank was to fail the funds would still be protected, not only for individuals but for companies and charities too.

The savings choice is no longer ‘the best of a bad bunch’, there are real choices on the market to maintain or even increase the value of cash. Yet, even with increased rates, the uptake on challenger banks is still low compared to high street banks.

Choosing a challenger bank may result in a higher rate of return it can also diversify your cash portfolio. The only remaining concern is the management of your savings accounts. Whilst one account is simple to open, larger funds may require multiple accounts. When these accounts have differing maturities, notice periods and sign-up processes it can be difficult to keep track. This is where a cash management service is crucial.

Yet, with long-standing customer relationships, the promise of financial security and big advertising budgets it is unsurprising that high street banks have been the savers’ choice for many years. Switching providers, even just for a savings account, can seem a laborious task when the administration burden is high. The rate of switching accounts to get an improved rate is so poor, that the latest FCA discussion paper talks of introducing a ‘base-rate’ interest rate to alleviate the impact of the inertia that we see in this market. This is on the back of a 5 year study on the industry and if implemented, will have a major impact on the high street banks that have a big book of longer term clients.

Even with government facilitation in the form of FSCS, high street banks are still the preference for many. They are consistently rated highly by ratings agencies and the ability to ‘pop into branch’ is an often-cited reason for preferring to keep cash centralised within a high street bank. Yet, there may be circumstances where a more diversified cash portfolio is preferable.

As well as maximising return by managing ones’ cash savings more actively, there are situations where the amount of money involved is more than £85,000. Examples of these scenarios including house sales, pension drawdown or Power of Attorney. In these cases, savers can spread their risk of across multiple banks, including challengers, and benefit from FSCS protection of £85,000 per person per banking license.