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Challengers are still driving savings improvements

Challengers are still driving savings improvements

Category: Savings

Updated: 21/01/2016
First Published: 21/01/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Average savings rates may be falling across much of the market, but there's one sector that's bucking the trend – and it's all thanks to challenger banks.

A mixed picture

Our latest figures show that ISA rates have fallen dramatically in the last month and average fixed rates aren't far behind, with the one-year fixed rate down by 0.03% (to stand at 1.43%) while the long-term fixed rate remains unchanged at 2.09%, bringing an end to the run of rate increases that were recorded for much of last year.

However, things aren't quite as clear-cut in terms of variable rates, and it's a particularly different story in areas where challenger banks dominate, most notably the notice account sector. Here, we can see that rates have increased for a further month, with much of it due to new launches and intense competition between smaller providers as they battle for new savers.

Size matters

The notice account sector is relatively small in comparison with other areas of the savings market, which is why this month's numerous rate increases and product launches from challenger banks – including Charter Savings Bank, Paragon Bank and United Trust Bank – have had such an effect. As a result, the average notice rate has risen by 0.01% to stand at 0.85%, which follows the notable rise of 0.04% recorded the month previously.

This is an ongoing trend in this sector of the market, and we've previously reported the positive impact that challenger banks are having on notice account rates. Their competitiveness and need for funds means that they're continually improving their product ranges, something mainstream banks don't currently view as a priority. And, because it's mainly challenger banks that are active in this sector, their activity is having a positive impact on rates.

Interestingly, challenger banks are also highly active in the easy access sector, but because the sector is so large, their rates have little impact. It's largely for this reason that the average no notice rate has fallen for a further month (down by 0.01% to 0.64%, the lowest seen since March last year), as although some challengers actually raised rates, the increases were outweighed by the cuts made on behalf of mainstream banks (most notably Bank of Scotland, Halifax and Lloyds Bank).

Get involved!

It's widely expected that the current trends could continue for the foreseeable future, as mainstream banks simply have no need for savers' money as they've already got healthy balance sheets. Challengers, on the other hand, are often smaller or are just starting out in the banking industry, so they need savers' funds to build their books – which means that it'll only be challengers who need to compete.

There are currently several new banks in the application pipeline, too, which could potentially signal more competition and higher rates when they officially launch. Their appearance will be hotly anticipated in the year ahead and it'll be interesting to see the kind of impact they have on the savings market as a whole, and hopefully, they'll help ensure that competition remains healthy – in some sectors of the market, at least.

What next?

Compare notice account rates

Don't fear challenger banks – find out more about them by reading our guide

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.