As Interest Rates Touch 14-Year Record, UK’s Neobanks Rival To Entice UK Savers With Attractive Yields

After the Bank of England raised its benchmark interest rate for the ninth time in a year, online banks in the United Kingdom are racing to increase the yields on their savings accounts in order to entice cash-strapped savers.

Following the announcement of the new rate hike on Thursday, Starling Bank and Chase U.K., the U.K. challenger brand of American banking giant JPMorgan, took steps to capitalize on the move.

Chase U.K. announced that the variable AER, or annual equivalent rate, on its saver account would be increased to 2.7% from 2.1% on January 4, 2023.

Starling launched its first savings product on Thursday, a fixed-term deposit account with a one-year guaranteed return of 3.25% on balances ranging from £2,000 ($2,439) to £1 million.

“Starling has been growing and developing its products and features in response to customer demand and need since launching its app five years ago,” a Starling spokesperson said.

“We’re constantly expanding our product line,” they added. We just launched Virtual Cards and our Fixed Saver account this week,” they added. 

The Bank of England raised its main interest rate by 50 basis points to 3.5% on Thursday, the highest level in 14 years. The Bank of England is attempting to contain soaring inflation, which is approaching 41-year highs.

Higher interest rates benefit savers but harm borrowers. They imply that savers will be able to earn higher rates of return on their deposits. Those who have mortgages, credit cards, or personal loans to pay are at a disadvantage.

Those who owe money on mortgages, credit cards, or personal loans, on the other hand, face higher interest rates.

“We’ve re-entered the era where banks use better savings rates to acquire customers,” Simon Taylor, head of strategy at fintech startup Sardine.ai, told CNBC.

“Those that can move quickly will, the rest will follow when their systems and processes allow them to.”

Deposit incentives from neobanks may eat into the companies’ profits. Fintech is notorious for unprofitable companies that prioritize rapid growth over making money in the short term.

Chase anticipates a $450 million loss on its overseas digital bank in 2022, followed by a similar loss over the next few years before reaching break-even in 2027-28.

Starling, for its part, reported its first profit in the fiscal year ending March 2022 after significantly expanding its loan book.

We’ve gone from a world where lending was cheap and deposit rates were low to one where lending is expensive and deposits yield higher returns, according to Taylor.

“The wave of challenger banks arguably now makes that more competitive,” he added.

It is not the first time that an internet-based bank in the United Kingdom has raised savings rates to higher levels.

First Direct, an HSBC subsidiary, began offering 7% interest this month, on the condition that customers deposit between £25 and £300 per month, up to a maximum of £3,600, and refrain from withdrawing for a year.

(Adapted from CNBC.com)



Categories: Economy & Finance, Entrepreneurship, Regulations & Legal, Strategy, Sustainability

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