- Looming negative rates and digital challengers push UK incumbents to compete on savings accounts.
- But directing resources toward other value-add features and tools could be a more sustainable play to build customer relationships.
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Lloyds Bank recently followed the lead of other UK incumbents offering “high-yield” savings accounts, with its own product carrying a 1.50% headline fixed interest rate, per Express.
RBS and its parent bank NatWest have a similar option, with a 3.00% variable rate on balances up to £1,000 ($1,282). As of December 2020, the average interest rate on a UK savings account was 0.19%, which at first glance, pales in comparison to the aforementioned offerings. But below the surface, prohibitive caveats—most notably a 12-month term for Lloyds and a £50 ($64) monthly contribution limit for RBS and NatWest—will likely erode any excitement brought on by attention-grabbing interest rates.
Incumbents are being forced to get creative with savings offerings, due to forthcoming negative interest rates and digital competitors looking to poach customers and deposits.
- Negative interest rates: Earlier this month, the Bank of England alerted British banks that it might set interest rates below zero, in an effort to reduce interest costs across the economy, boost borrowing, and encourage investment. But this benefit could come at the expense of savers, especially at a time when household savings have skyrocketed in the country. The new savings products offered by incumbents could potentially be used to assuage these fears.
- Digital challengers: Savings products offered by digital banks are less beholden to restrictive guardrails (such as the limits on the term and contributions), highly sought after in the UK, and an increasing threat to incumbents. Goldman Sachs’ digital consumer bank Marcus, for one, just reopened its savings accounts to UK consumers after a surge in demand earlier this year forced it to halt new sign-ups. Lower infrastructure costs for online competitors enable their product offerings to remain resilient amid market headwinds. Being able to offer the highest rate on saving deposits is one of the most important attributes that UK adults consider when choosing a bank. Incumbents’ flashy new savings offerings are an attempt to compete with their digital-only counterparts in order to meet this significant need.
But competing on savings account interest rates could also be a race to the bottom, so banks should look to other solutions to deepen customer relationships. The pandemic has economically hobbled UK banks, and it remains unclear whether negative interest rates may actually make things worse.
Weak financials hinder their ability to offer flexible and robust products, making their “high-yield” savings accounts little more than a flashy marketing tactic. Instead of competing on savings accounts, banks should seek to create innovative products or cross-sell existing solutions that will create stickier and more profitable sources of income.
For example, low-income or first-time savers using digital and traditional banks would benefit from money management tools that help them manage their savings and investments. Features that enable consumers to reduce subscription costs, assess spending levels, and identify savings and investment opportunities also could be of particular interest.
Likewise, incumbents with a more comprehensive product suite could cross-sell their wealth management and investment expertise, diversifying into fee-based income products less susceptible to changes in interest rates.
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