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What Tipping Points might there be in the UK Savings Market?

Monday 2 December 2019 Data Insight & Analytics

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Paul Kenny's picture
By Paul Kenny

Recently, I was invited by the Financial Services Forum to speak at their event, ‘Consumer Banking: Are We at a Tipping Point?’ It was prompted by open banking’s forthcoming second anniversary, and I was asked to focus on the savings market. The request sparked so many reactions in me that I ended up having to speak very quickly indeed, and I promised delegates that I would follow up with a trio of blogs. This first one focuses on tech.

PART ONE: TECH

The state of the market

The UK savings market is certainly having a strong year. The members of our savings services have generated more than £18bn in cumulative net inflows YTD; this year’s ISA Season was the longest, most beneficial for providers in four years; and even the fixed term non-ISA, that most out-of-favour of savings products, has experienced much lower net outflows than usual.

The effect of tech

Tech has certainly played its part. Back in 2015, when I first heard Mark Mullen talk about basing Atom Bank’s app on Unity’s gaming platform, part of me applauded him – anything that engages the young in retail finance is good, they’re the ones who will benefit most from the compound effect of interest – and part of me thought, ‘But kids don’t have any cash to save, how are Atom going to generate funds?’

Four years on, a second digital banking wave, involving older, wealthier consumers, is influencing the savings market, and will continue to grow. We estimate that in 2024, almost five times as many over-50s will take out a digital savings account as those using non-digital channels.

The hurdles still to be overcome by tech

Open banking faces several obstacles, not least consumer mistrust. ‘Why should I give them my password? What risks am I running? What benefits do I get?’ And providers should be cautious too: if open banking gives a mortgage provider access to 12 months of bank statements and due diligence isn’t performed on them, then caveat venditor.

I find CASS, the Current Account Switching Service, an interesting reference point – impressive, reliable technology, implemented swiftly and effectively, and yet it has hardly revolutionised the current account market. Discussions have begun on extending the functionality into savings, where it may have more impact – there isn’t the mortgage direct debit to fret about – but one reason why impressive, reliable CASS was implemented swiftly and effectively was its great expense, which the broader range of savings providers might baulk at. Perhaps the framework supporting e-ISA transfers might offer a more acceptable solution.

The competitive response

Of course, traditional providers aren’t simply sitting back and watching their deposit funding flow to digital challengers. Witness the rise of the defined access account. Look at the tin and it appears to be instant access. Open the tin and it’s almost fixed, with withdrawals restricted to two or three per year.

The biggest savings obstacle facing tech

Consumer inertia is the Becher’s Brook of retail finance – CBA, as kids might say. If you took the average instant access non-ISA balance and rate, and moved it to a best buy account, after a year you’d have earned about £70 more than if you’d done nothing. I suggest that few consumers do the sum, and fewer still act on it. I don’t see tech changing that any time soon.

One last reference point

One of the UK’s largest mutuals has found that its passbook is a USP. Now that won’t help that particular institution appeal to younger consumers, something it will have to do if it is to prosper in the decades ahead. But it does suggest that the savings sector will not face a tech-led tipping point just yet.

 

The second instalment of my blog series is now available and assesses how competition could be leading to a tipping point in the market.

The first in a trio of blogs: has tech created a tipping point in the UK savings market?

What Tipping Points might there be in the UK Savings Market?