The days of dreary rates of interest on deposit accounts may be numbered, thanks to a new player in the market who could force rival banks to offer better deals.
ING, the Dutch banking giant, announced this week it would take deposit account savings rates by storm, offering 4.3 per cent on an annual equivalent rate. You need only £1 to open an account, there are no fees and no penalties if you leave.
The account, live this week, pays the same interest rate to all customers irrespective of the size of deposit, which can be as high as £2m. There are no tiers to the account, no minimum deposit level, no withdrawal notice period. The news is very good for the increasing number of savers frightened off the stock market who are looking for a safe place to put their cash.
But safety has always come at a price and deposit savings accounts have had paltry interest rates of no more than 2 or 3 per cent.
ING has provided a wake-up call to savings accounts providers. Although the name may not be familiar to many people in the UK, ING Direct is part of the global ING Group, which offers banking, insurance and asset management to more than 65 million private, corporate and institutional clients in 60 countries. It sprang to prominence in Britain eight years ago when it bought the remains of Baring Brothers after that ancient merchant bank had been brought to its knees by the rogue trader, Nick Leeson.
ING Direct has been tried and tested around the world before launching in the UK and has 6 million customers worldwide. "The UK banking industry needs shaking up," Lindsay Sinclair, chief executive of ING Direct, said. "Customers need to be able to unlock the complex and confusing savings market. Our savings rate of 4.3 per cent, delivered simply and securely, will remain at the forefront of the industry,"
ING may be big, but how long can it keep this rate on offer for? Many companies start with headline offers to lure in customers, who then find interest rates fall to much lower levels. Research by Birmingham Midshires shows that more than half of all savings accounts appearing on best-buy tables disappear within two months of launch.
But ING promises that its great value offer is not just a flash in the pan and it will remain as the best offer on the market. "We do not do introductory offers," Mr Sinclair said. "We agree with consumers who find them cynical. Our aim is to be at the top of the best-buy tables and stay there."
How can ING afford to offer it? To fund the interest rate, ING invests in gilts and uses its slick operating procedure to reduce costs. "We have low overheads and no branches and this saves us money," Mr Sinclair said. "We pass those savings directly to customers in high interest rates. Every £100 of savings with us costs us only 40p to look after. It costs most high street banks £2.50 to £3 for every £100 they hold on deposit."
Alex Rowley, a City banker who served in the Parachute Regiment, has seen how quickly interest rates drop on deposit accounts. "I opened a Cahoot account a month ago. I did have an Egg savings account, which at first looked good value, but I suddenly noticed the rate had dropped down to 2.25 per cent. I am a bachelor and have a mortgage to pay, so although my savings are secondary to that, I still want to know that I am getting a good rate." Mr Rowley, 31, who lives in Ham, near Richmond upon Thames in Surrey, added: "You do need to keep watch on what is happening to your interest rate because you are not always notified in the most easily visible way. Cahoot promises that its rate will never fall below the Bank of England base rate, so I can rest assured I am always getting a good rate of return."
The ING Direct account, so far, would beat the competition from Egg, Intelligent Finance and Cahoot, which themselves turned traditional savings rates on their head when they launched a few years ago.
A table of the top rates from Moneysupermarket shows that ING would go straight in at number one on the best-buy table, followed by Halifax with its WebSaver account, which offers 4 per cent and is internet-operated. Northern Rock also offers 4 per cent on its internet-only Tracker Online account. Cahoot offers 3.9 per cent on an internet-only deposit account and Egg offers 3.75 per cent.
Stuart Glendinning, of Moneysupermarket, said: "The nearest account to the ING offering, with internet, post and telephone access on a minimum £1 investment is NatWest with 2.68 per cent."
There are higher rates on offer, but what you earn in interest you lose in some other service, usually the access you have to your money. The ING Direct account can be accessed 24 hours a day, seven days a week via the web, www.ing direct.co.uk, a call centre, as well as postal options. Interest on the account is paid monthly, and customers wanting an account must be resident in the UK and aged over 18. One person can open 10 accounts.
The ability to access the account by internet, post and telephone is not a service many other banks provide for the same rate. Leeds & Holbeck, for example, has a savings account offering 4.5 per cent, but it is serviced only via post, which will put off many who want instant access to their funds.
Higher interest rates are also available on accounts where your money is locked in for periods. The big four banks are known for their derisory interest rates on deposit and current accounts, and in the wake of easier switching and lessening customer loyalty, they are under pressure to improve offerings.
"The big providers have had it easy in the past few years," Mr Glendinning added. "They are lethargic with their rates and this ING account is bound to cause a shake-up among other providers. It is always good to see more competition in the market; that makes for a better deal for consumers."
A few percentage points between interest rates may not seem worth switching accounts unless you hold significant amounts on deposit. So it may take a while before ING manages to convince us its headline-grabbing rates are here to stay. Mr Rowley says he will wait to see if ING lives up to its promises before switching from Cahoot.Reuse content