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Savings Accounts: Past, present and future
Until the late 18th and early 19th century, there was no facility for most people to save. Banks did not accept small deposits and had no interest in anyone but the rich. Although building societies existed then, their purpose – as the name suggests – was to finance the building of houses.
The idea for savings banks evolved against a background of severe economic decline and appalling poverty. The philanthropists who set them up were motivated by a strong belief in thrift and self-help. But their establishment was not purely a philanthropic gesture; savings banks made sound economic sense. The rudimentary welfare system of the day, based on charity and local taxation, was proving woefully inadequate in tackling widespread poverty. Enabling and encouraging people to save would reduce the burden on the system and provide those who saved with a better quality of life.
The customers of savings banks were some of the poorest in society. The banks provided a secure store for their savings and rewarded saving with a good rate of interest. By helping people to help themselves, they believed saving was a force for the common good.
The modern savings market
The world of saving has come a long way since its benevolent beginnings. There is now over £1.1 trillion on deposit in the UK and the market has become confusing, complex and often predatory.
Today’s banks and building societies are not altruistic or philanthropic. They are businesses and, as such, need to make a profit. To this end, they want to pay savers as little interest as possible. They accomplish this in two ways.
Exploiting savers’ inertia: Attractive bonus rates are offered to tempt investors to open new savings accounts. But the attractive rates expire after a set period. The institutions know that the cost of offering an attractive temporary rate is more than offset by the number of savers who will fail to move their money at the end of the bonus period, even though they subsequently get a very modest rate of interest
Another tactic is to close high-paying accounts to new savers and gradually reduce the rates on offer to existing investors, in the hope that they won’t notice and simply leave their money where it is.
Confuse and conquer: There is a plethora of different savings accounts with all sorts of different features, making it hard to compare like with like. Accounts might be operated online, by post, through the branch, by telephone or any combination of these. It may have minimum and maximum balances, limited or unlimited withdrawals, a fixed or variable interest rate. Access might be instant, limited to a maximum number of withdrawals, require notice or be totally prohibited until the end of a defined term. Early access may incur a penalty or might only be allowed at the bank’s discretion. The account may or may not be classified as a “payment account” or a “non-payment account” and hence be subject to different regulations. The account may be open to everyone or only to existing customers. And of course all of these permutations can be applied to ISA or non-ISA accounts.
The names of savings accounts may themselves be misleading. In 2010 Which? found accounts paying less than 0.15% with names like “Reward Saver”, “Triple Gold”, “Liquid Gold”, “Diamond Reserve”, “Extra High Interest Account” and “Midas Gold”.
While there may be something for everyone out there, the similarity of names, bonus rates, zombie accounts, and lacklustre communication from many providers is an example of product differentiation gone mad. It all serves to bamboozle the customer and make the saver’s life harder rather than easier.
The future of savings accounts
In October Mark Hoban, Financial Secretary to the Treasury, announced the setting up of a new steering group to devise simplified financial products. The group has been asked to focus on protection insurance and simple deposit savings. After consultation with the industry and consumer groups, the aim is to publish a consultation paper by the end of the year. Carol Sergeant, chair of the group said:
“Simple, easy to understand products need to be a viable commercial proposition for the industry, while offering consumers a straightforward benchmark that gives them the confidence to make good decisions in an often bewilderingly complicated market place.”
Let us hope that the influence of the financial industry will not prevail over the interest of the saver. There is no hint whether the steering group will be looking at the extraordinary way in which it is so much more difficult to open even a modest savings account than it is to get a zero-interest credit card. The requirements of money-laundering rules apparently require production of passports, birth certificates and driving licences. Woe betide those who don’t possess passports or driving licences or, indeed, the young children who can’t produce their latest utility bills. Some savings accounts require details of occupation and earnings.
According to Mr. Hoban:
“Simple financial products have the potential to help many consumers make decisions that will help them save for the first time and plan for a secure financial future for them and their families.”
Ultimately, however, it is not the design of the savings products that will ensure that people can save for their futures, but the returns. An environment of negative interest rates and freely available 0% credit card interest is hardly the best way to encourage long-term savings.