Q: Your latest emailing mentions challenger banks. How does one access them for savings products? Do they have a high street presence for us oldies?
Anna’s response:
Many thanks for your question – we often talk about challenger banks for the simple reason that they are often paying some of the very best rates in the savings market and doing the most to drive competition at the present time.
The term challenger bank is quite loosely defined and can technically refer to any provider that is competing against the established high street names.
More specifically in our context, we are mainly referring to the newer and lesser-known names that have entered the savings market and are competing most actively in our best buy tables.
Now, whilst the obvious advantage to using challenger banks that feature in our best buy tables are the higher returns on offer, access to the accounts themselves is often more limited than is the case with their high street rivals.
Challenger banks can cut overheads because they don’t have an expensive high street presence, which for those who prefer to save this way is a clear limitation.
Often accounts from challenger banks are only accessed online, which means than those who prefer to open and manage their savings in a more traditional way may need to look elsewhere and potentially compromise somewhat on the interest rate that they will receive.
That said, there are challenger banks that recognise that some prefer not to deal with everything online – for example PCF Bank also accepts postal applications.
At the moment, in our five year fixed rate bond table, PCF Bank sits just 0.01% behind the online-only market leader, Secure Trust Bank, paying 2.68% gross/AER rather than 2.69%.
This just goes to show that, while the gap between the top online-only accounts and those offering more traditional access options can vary between providers and account types, you do not necessarily have to resort to the much lower rates that are available on the high street.
Take, one year fixed rate bonds – if you were depositing £5,000 for example, the best rate available on the high street is 1% gross/AER with NatWest.
You can get more than double this by using a challenger bank – PCF Bank is paying 2.03% gross/AER.
Of course, one of the reasons why people may be more reluctant to try a less familiar name and stick to the big high street banks is a perceived lack of security in comparison.
However, this should not be a concern, as all providers that feature on our best buy tables are subject to the same rules and regulations – there is no difference in that respect.
Crucially money placed with all providers that we feature – challenger banks and high street names alike – are covered by the UK Financial Services Compensation Scheme (FSCS) or European equivalent.
The limit of £85,000 per person, per banking licence (€100,000 for European schemes) applies to each provider and so if you have any concerns whatsoever, sticking to that limit would give you peace of mind that your money is protected should the worst happen.
Generally speaking, the newer challenger banks have their own FSCS licence and so there is little danger of unwittingly breaching the limit by placing funds with a provider with a shared licence.
In contrast, a number of high street banks share a banking licence, sometimes with brands you may be less familiar with, so you need to be wary.
For example, Halifax shares a banking licence with Birmingham Midshires, Saga and Bank of Scotland among others – so if you had funds with all of these brands, only £85,000 of the total you hold with them is protected.
So, while they may not have a high street presence, it is still worth considering a challenger bank – after all you may be able to get a much better return in today’s savings market.
If you need any further help with finding the accounts that are most suitable for your needs, please call us on 0800 011 9705 to speak to one of our expert savings specialists.
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