Last week, Santander, one of the UK’s most popular high street banks, announced that they were cutting interest rates on their 123 account from 1st November 2016.
The interest rate will be halved, taking it from the current top level of 3% down to 1.5% AER variable. This particular account is a regular feature within client cash savings for obvious reasons. A top rate of 3% far exceeds the vast majority of high street instant access savings accounts and with Bank of England base rates at 0.25%, a 3% rate of interest is more than many fixed term accounts are offering.
There are other changes to the structure of the account. One of the attractions for many clients is the tiered structure, starting at 1% for the first £1,000; 2% once the balance reaches £2,000 and 3% once the balance exceeds £3,000. Not surprisingly, many clients often structure their cash savings to ensure as much of their cash as possible earns 3%. From November 2016, the tiering disappears and there will be a flat rate of 1.5% irrespective of balance size.
There are various other cash back reward schemes applying to the account in exchange for a monthly fee of £5, which increased earlier this year. Gone are the days of a simple savings account.
So why have Santander made this change and what impact will it have on savers? Santander have been extremely successful with the marketing of this product. It has been hard to avoid the Olympian adverts since London 2012 extolling the virtues of Santander and they have attracted millions of new savers. That the announcement followed hot on the heels of the recent Bank of England base rate cut is mere coincidence I think, because it has been mooted for a while that this change to the 123 account would take place. Decent interest rates cost banks money, which is why most banks and building societies don’t offer attractive rates at the moment. Perhaps Santander feel that even the reduced rate of 1.5% AER will still be so competitive against their peers, that savers won’t bother taking their savings anywhere else, because the alternatives are no better.
The reaction to Santander’s decision has been quite negative amongst savers and the press, but it shouldn’t be surprising, on a purely commercial basis, why would anyone pay more than necessary in order to win or retain business. Santander have been a success story of the U.K. banking industry, they helped shore up the failing UK banks and building societies in 2008 following the financial crisis and they have quickly won the loyalty and custom of millions of savers.
With fixed rates of around 2.1% AER available for a five year fixed term account across the marketplace, cash deposits remain a tough place from which to see a return. The debate really shouldn’t be about the rights and wrongs of Santander’s decision, but more about what savers do with their cash in this increasingly challenging environment for interest rates. The U.K. Government don’t want money sat in cash, they want it circulating in the economy and want to encourage spending not saving, so I wouldn’t expect to see rival banks trying to exploit Santander savers by wooing them with a fantastic interest rate deal on new accounts, if anything, it may give them more reason to cut their own rates in turn.
Ultimately, we all need to keep some cash on deposit, but we also need our savings to generate a return for us and that is something that the banks and building societies may not be able to help us with any time soon.