Banks are continuing to provide poor value for their customers and consumer habits are partly to blame, according to new research from the Financial Conduct Authority (FCA). The financial services regulator says that many banks are able to offer miserably low interest rates because customers don’t shop around for a better deal. In fact, the FCA found that the most loyal customers may be suffering disproportionately, with banks paying lower interest rates to those who stayed with them for many years.
40% of Customers Dissatisfied with Their Bank
The interim report by the FCA tallies with provisional findings by the Competition and Markets Authority (CMA), a new watchdog that recently announced it will launch an 18-month investigation into the UK banking sector. According to the CMA’s figures, despite the fact that over 40% of customers of the big four banks – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays – are dissatisfied with their bank, a mere 3% of personal current account holders annually switch to another bank’s services. The big four banks alone control 77% of the UK’s 65 million personal current accounts.
Most customers believe there is little to choose between the services offered by the main high street banks. A lack of transparency over bank charges only adds to the problem as many people end up keeping their money in accounts that are ill-suited to their needs. Customer confusion over available options, together with a sense of acceptance and resignation, means the vast majority of UK savers are putting up with dismally low interest rates on their money.
Uncompetitive Bank Practices Criticised
Both the FCA and the CMA are looking to increase competition in the banking sector, which should lead to improved interest rates for customers. Among the recommendations expected, banks will be obliged to make it easier for customers to switch providers as well as offer greater transparency over their rates and charges. However, the FCA has not yet suggested a ban on so-called ‘teaser rates’, the introductory offers banks make for a limited time only, after which rates typically fall dramatically.
While a small minority of engaged consumers regularly shop around for the best savings deals on the market, most do not. Even with encouragement from the FCA and the CMA, many more customers will need to start voting with their feet for the banks to take notice. There are many alternatives to the poor rates on offer from the main high street banks, and customers should be doing more to ensure that their money is generating a healthy return.
Alternative Ways to Invest Money
With bank savings rates at historically low levels, smart investors should be considering available alternatives. Tax-exempt ISA accounts – allowing individuals to deposit up to £15,000 tax free each year – may make sense for some customers, particularly those paying higher rates of tax. However, typical interest rates on ISAs are currently so low that they often cancel out the benefits of tax free saving, so customers will need to shop around to ensure they’re really gaining an advantage.
Peer-to-peer (P2P) lending is another good option for those wishing to make their money work harder for them. P2P platforms allow individuals to lend their money in small parcels to those wishing to borrow. By removing the need for large financial institutions – with their equally large overheads – P2P lending can provide investors with very high returns on money loaned.
The annual interest rate offered to investors on money lent is typically around 6% and sometimes even higher. While customers should understand that P2P lending is not the same as putting money in a savings account – with loans not protected by the Financial Services Compensation Scheme (FSCS) – many find that the high returns to be made outweigh any risks involved.
As well as investing in P2P platforms, customers can opt to buy retail or government bonds or build a portfolio of stocks and shares. Spreading the risk can help to minimise potential loss, and customers will enjoy the added bonus of having more say over where their money goes. Investing money in alternative markets is a good way for consumers to fight back against the uncompetitive – and even anti-competitive – rates on offer from banks. Instead of continuing to put up with bad bank rates, UK customers should start looking into the growing range of investment alternatives on offer.