High-street banks are shortchanging cash savers
Many savers are choosing cash during a time of uncertainty, but many savings accounts still yield under two per cent. There is a better way, says Nigel Terrington
In periods of relentless noise, steep market sell-offs and economic uncertainty, the most sensible decision can be to do nothing. To accomplish this, you need to hold cash.
Cash, once derided as “trash” in the era of zero interest rates, is making an unglamorous but quietly powerful comeback. For the saver, it offers something that no ETF, bond or share can provide during turbulent times: optionality and calm. In volatile markets, the ability to respond, or to wait, is the most underrated benefit of all.
Yet for all this, savers are still being short-changed. High street banks, flush with deposits, are offering savers paltry returns, often well below the Bank of England’s base rate. At the time of writing, the base rate stands at 4.5 per cent and the rate of inflation in the economy is running at 2.8 per cent and is likely to rise. A quick scan of major UK retail banks reveals that many instant access savings accounts still yield well under two per cent. For a product that allows the bank to re-lend, re-invest and profit handsomely, that’s hardly a fair deal for savers.
Why does this matter now? Because holding cash isn’t just a passive strategy, it’s an active one. It is a tactical choice in an uncertain economic climate marked by geopolitical risk, persistent inflationary pressure and mispriced equity exuberance. Cash allows savers to wait for greater certainty before investing in risk assets, and if they are drawing an income from their investments, to avoid panic selling. It also provides workers with a degree of security against the effects of an economic downturn or resurgence in cost-of-living pressures.
But the system disincentivises misguided prudence. High street banks have taken advantage of customer loyalty, who assume their deposits are working harder than they actually are. Savers that have worked this out can access money market funds through investment platforms or set up savings accounts after conducting research through best buy tables. Yet, this involves considerable time and admin. In an era when you can order a takeaway on your phone within two minutes, it shouldn’t be so hard to access a fair savings rate and move money in and out in a heartbeat.
Eroding trust
This status quo is structurally problematic. In a society where trust in business and financial institutions is low, the under-compensation of cash holdings by high street banks erodes confidence in the system. It also exacerbates inequality. Those who have cottoned on to the issue and have the time can move their money into higher-yielding products, while others see the value of their cash silently eroded by inflation.
It is shocking to think that over £520bn of UK consumer savings languish in low-interest high street current and savings accounts, representing tens of billions in lost wealth every year
It is shocking to think that over £520bn of UK consumer savings languish in low-interest high street current and savings accounts, representing tens of billions in lost wealth every year.
Savers deserve better, and the market is moving to solve this problem. At Paragon, we have £16bn in deposits where we are paying savers a fair rate. But the customers we have are the people who have already done their homework and have gone through the process of setting up a savings account with us.
To create a much smoother customer experience, we have launched a true easy access savings app called Spring. This integrates directly with existing current accounts, enabling savers to seamlessly transfer money and earn fair rates within minutes.
Granted, the easiest solution would be for savers to be offered a fair rate by their high street banks. We have been waiting a long time for this, and call me a cynic, but don’t expect it to happen anytime soon. In its absence, the market is finding a way. Cash will always be king, and fair rates are good for society.
Nigel Terrington is CEO of Paragon Banking Group