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A little financial risk might be good for you!


Insights from Cash Savings Market study : FCA Interim Report July 2014

Recently, an important study from the Financial Conduct Authority on the UK Cash Savings Market has highlighted the low rate of return many savers are getting across a variety of savings products. Given the high rate of returns (risk adjusted) available from investing your capital in loans on crowd lending platforms, it might certainly be the case that “a little risk might be good for you!”

Here at LendingCrowd, we explored some of the findings in the report, and found it may prompt Investors to reconsider how they are allocating their cash savings to earn a better return on investments. The report’s authors state:

“Large numbers of consumers are not actively shopping around for savings accounts or providers. In response, providers, on average pay lower interest rates on older accounts than on accounts opened more recently, such that consumers who remain with the same account for long periods of time will tend to receive lower rates on their savings.”

So what does this mean? Around 82% of UK consumers hold a cash savings product, with savings per account of around £6,400 in the study. In total UK Consumers hold £699bn in savings, with 50% held in easy access accounts providing only modest returns.

Total UK Balances in different types of accounts

FCA Cash Savings Market Report

Total UK bank balances in different types of accounts.

Pg 8 FCA Cash Savings Market Report

 

When choosing a savings account, the key factors a customer considers are the interest rate, other product features (e.g. term of account), the loan providers overall service proposition, relationship with the firm and perceptions of the loan provider.

Since typically the higher a customer’s balance, the higher the rate of return they receive; higher balances are more likely to be held in fixed term accounts, as evidenced in the graph below:

 

Percentage of accounts with balances falling into the different balance bands:

Percentage of accounts with balances falling into the different balance bands.

Percentage of accounts with balances falling into the different balance bands.

 

Consumer behaviour varies; from rate chasers, who keep a keen eye on rates being offered, to a large group of us who pay little attention to the savings accounts on offer, to a middle-ground group who periodically review their holdings and switch every few years. Evidence suggested 24% of consumers surveyed had switched a savings account from one provider to another in the past three years, but that most had not switched their provider for many years.

The report shows that since 2011 the interest rates on offer to savers across all the product types reviewed has fallen, which offers good reason for savers to review their allocation of cash savings by product type as returns have deteriorated.

 

Changes in average interest rates on various types of cash savings products over time.

Changes in average interest rates on various types of cash savings products over time.

Changes in average interest rates on various types of cash savings products over time.

 

The report presented evidence that showed that balances that had been held in accounts for longer than two years on average had a lower rate of interest than that earned on accounts opened up to 2 years ago.

 

Total balances and average interest rates (weighted by balance) for easy access accounts by length of time account opened.

Total balances and average interest rates (weighted by balance) for easy access accounts by length of time account opened.

Total balances and average interest rates (weighted by balance) for easy access accounts by length of time account opened.

So while the risks of allocating cash into crowd lending are very different to holding money in a typical savings account – namely the investment is not backed by the Financial Services Compensation Scheme, and should the borrower default that portion of an investor’s portfolio will not achieve the expected return – the upside potential is certainly beginning to attract interest from a growing number of UK consumers.

 

Peer to Peer Finance Association Q2 2014 Information.

Peer to Peer Finance Association Q2 2014 Information. UK Crowd Lending Business Loan amounts, investor numbers and borrower companies.

Peer to Peer Finance Association Q2 2014 Information.

UK Crowd Lending Business Loan amounts, investor numbers and borrower companies.

 

Investor Interest rates by risk banding on the LendingCrowd Platform.

Investor Interest rates by risk banding on the LendingCrowd Platform.

Investor Interest rates by risk banding on the LendingCrowd Platform.

 

So as investors or savers reflecting on the returns from cash you hold in traditional savings accounts, as we said at the start of this feature “a little risk might be good for you”.

To learn more go to: www.lendingcrowd.com/borrower

 


 

Roger Ashworth

Head of Marketing & Business Commentator

Article author

Lending Crowd

Lending Crowd

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