Why savers should be going off online
The lure of introductory bonuses are disguising the poor interest rates on offer from internet-only savings accounts. Julian Knight reports
Sunday 10 June 2012
The brave new world of internet savings accounts promised so much. Choosing to bank online would cut the costs of providers who in turn would pass this on to you in the form of higher rates. But exclusive research carried out for the Independent on Sunday shows it isn't working out like this, with internet-only savings actually trailing postal, telephone and even some branch-based accounts in terms of the rates paid.
The analysis of the top 10 easy-access savings accounts from Moneyfacts.co.uk which do not pay an introductory bonus shows that in six instances the offline account beats the online-only account for rate. In the other four cases offline and online pay the same but in no instances does an online account rate win through.
As for the top easy-access individual savings accounts the picture is even starker with offline accounts beating online across the board. It is only when headline-grabbing introductory bonuses are factored in that online outperforms and this advantage can soon disappear.
"About one in five accounts has an introductory bonus and many of these can be accessed online but the overwhelming majority only offer a bonus for a year, so on the first anniversary of the opening it's best to switch as the rates can suddenly become quite poor, whether they are online only or not," David Black, banking analyst at Defaqto, says.
Last week, the malaise surrounding internet-only accounts was thrown into sharp focus when the Co-operative's Smile online-only banking brand cut the rate it pays on its current account to zero, leaving the best-buy, in terms of credit interest, current accounts firmly branch based. "Brands like Smile and First Direct, which dispensed with paying interest a while back, sell themselves on service rather than rate but it's a little surprising that the cost savings of being internet based are not being passed on," Andrew Hagger, savings expert at Moneynet said.
Mr Hagger reckons the money that in the past rewarded those who chose to go online is now being directed into introductory bonuses to bring in new cash, to help prop up banks' balance sheets. "Securing funding is the key for banks and building societies. This is much more of a priority than say cost savings on staffing from bringing in more money through online account offers. The truth is that as a result of the financial crisis online banking has not delivered for savers all we had hoped for a decade ago," he says.
It seems that the room for manoeuvre for providers in terms of rate they can offer is so tight that it's difficult for online accounts to stand out any more. "When Bank of England rates were at 5 or 5.5 per cent there was more of a range of rates that could be paid and options for new players to come into the market and be substantially best buy, normally through online. But with rates at 0.5 per cent there is so little room for providers to work with," Mr Hagger says.
This is borne out through recent events. A few weeks ago the best-buy easy-access savings account, with an introductory bonus, came from the Coventry building society and paid 3.15 per cent. This was then trumped by the Post Office, which offered 3.17 per cent. That is a difference of just 0.02 per cent, or £2 a year, in extra interest a year for every £10,000 saved – very meagre pickings.
Online doesn't seem to carry the cachet for providers it once did, apart from accounts with an introductory bonus which are geared towards those rate hunters looking to shift money to maximise returns.
But Louise Holmes, a savings expert at Moneyfacts.co.uk reckons in the post-credit crunch world providers are looking for cash regardless of which route it comes in: "Providers are keen to be seen offering competitive products to all customers, not just necessarily to those online. Despite the online phenomenon, many people still prefer to visit their local branch or speak to a real person to discuss their savings options and conduct business.
"Offering decent rates to savers who may prefer to conduct business in a traditional way demonstrates providers are catering to all their savers' needs and projects the image of a 'good, considerate provider'," Ms Holmes says.
But whether you are saving or banking online, over the phone or in branch the message seems clear: if you want to maximise returns then loyalty does not pay. The average return on a savings account for instant access is higher online than in branch – 0.89 per cent offline while 2.15 per cent online. But this reflects large numbers of long-standing branch and telephone accounts which once paid a high rate but have been allowed to wither on the vine.
Mr Black says: "if you have been in the same accounts for a couple of years or longer ... you will definitely benefit from switching."
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