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  • Ian Buss

Deposits - The Big 4 vs Challenger Banks

Why are the Big 4 banks currently paying around 0% for instant access deposits yet other UK banks are paying between 0.10% and 0.50%?

Quite simply, the Big 4 have little appetite for holding more deposits at present.

And it's not just instant access deposits where we are seeing a difference. The gap gets even wider when we start to analyse notice and term deposits. Whilst one of the Big 4 is offering between 0.03% and 0.05% for notice periods of 32 to 95 days, other UK Banks are offering between 0.10% and 0.70% for similar notice periods.

We've seen headlines saying that the UK is saving more, resulting in more cash held at the banks. As the Big 4 have the largest percentage of current and savings accounts, it follows that they are holding the most cash. (It's thought that as much as £148bn was put away between October 2019 and October 2020).

You can now start to understand why the Big 4 may have little appetite for additional deposits.

Smaller banks (challenger banks), on the other hand, tend to have much lower volumes of current accounts and savings accounts and, to ensure they meet liquidity requirements, tend to offer better interest rates for cash deposits.

One of the biggest barriers to the Not for Profit sector (Schools, Charities etc.) to spreading funds across multiple banks to enjoy higher returns (and potentially greater FSCS cover) is the time and effort it takes to open each bank account.

Personal depositors have had the ability to simplify the account opening process by using 'Cash Deposit Platforms' for a number of years. (If you search for 'Which Savings Platforms', Which magazine has a good on-line article about the solutions).

Cash Deposit Platforms are now available to the Not for Profit sector.

This provides the opportunity to potentially benefit from achieving a higher rate of return from multiple bank deposit accounts as well as increased FSCS cover (subject to FSCS eligibility) without the time-consuming and painful process of having to open bank accounts yourself:

One form, Multiple Banks:

One simple application form supported (usually) with a video call to verify ID for 2 signatories should have the platform set up and operational for the organisation in less than 72 hours.

Multiple Deposits on 1 sign on:

The on-line platform then allows you to place your deposits with as many of the partner banks as you wish and across as many different types of deposit account as you need. (All the banks on the platform use your initial ID verification to open the accounts without further ID or forms being needed).

In your name:

The accounts being opened up should all be opened in your name or as a designated client account in your name ensuring that your funds are always held by the partner bank and not by the platform provider.

FSCS Protection:

Assuming your organisation is eligible for FSCS cover then you will have the relevant cover with each of the relevant banks you are using on the platform (Make sure they are UK registered Banks and part of the FSCS scheme - your platform provider will be able to confirm this).

Security:

The platform should set access up so you are required to use 'two fact authentication' to sign on, give you the option of 'dual authority' for withdrawals and only allow funds to be withdrawn to your original nominated bank account. They should ideally be registered with the FCA.

Fees:

The platform should only charge you a very small percentage of the funds you have on deposit (e.g. if the platform is charging you 0.10% per year and you deposit £5m at a blended rate of 0.75%, your net return would be 0.65%).


We are tending to see Schools and Charities increase their existing returns by between 8x and 30x and enjoying the speed of depositing cash in a new bank as quick as checking a balance on-line.

For further information please click here:

www.educationbanking.co.uk/deposit-solutions

Example Illustration (rates correct at 10th September 2021)

"School A" holds £2m in a 95 day notice with their bank and is currently being paid 0.05%. This (assuming no withdrawals and no changes of interest rate) will give them £1,000 interest in a year.

If the same school used a cash deposit platform with the £2m being spread over 3 example banks (to spread risk and increase FSCS cover where applicable) with notice terms of between 31 days and 90 days, they would (subject to no withdrawals or interest rate changes) pay an annual fee of £2,500 and receive circa £10,600 interest in a year. (equivalent to £8,100 net of fees).

This results in "School A' enjoying over 8x the interest as well as 3x the FSCS coverage.

FSCS eligibility will depend on the institution making the deposit. Eligibility should by checked directly with the FSCS.

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