THE BACKGROUND - The savings sector is an odd mixture of inertia and innovation. On the one hand, fewer than 2.5% of customers say they opened a saving account last year somewhere other than where they have their bank account. But on the other, new players have successfully attracted hundreds of thousands of customers. Only last month Morrisons was the latest supermarket to enter the financial services sector, which has seen huge innovations thanks to new entrants such as online bank Egg and direct companies like ING Direct.
With more than 100 different savings account providers, UK savers are not short of options when it comes to putting their money away for a rainy day.
In 2003 there were 88 million interest-bearing instant access accounts held by the major British banking groups, according to Mintel data. Around 20% of these were savings accounts (including TESSAs and cash ISAs) with the rest made up of current accounts offering interest.
While instant access accounts grew only 2% in 2003, time accounts (where notice has to be given to withdraw money) went up 12% to almost 18 million in the same year.
According to data from the Financial Services Authority there were 21 million building society accounts, worth a total of £147bn. The average amount saved in these accounts has increased by a third from 1999 to 2003 to reach £6,860.
The range of accounts and providers on offer to UK consumers is huge and the most important factors influencing savers on which accounts to go with include the interest rate offered and the choice of access points available. Other influencing factors include the ability to access money without notice, company reputation and which branch is most local.
While this sector has seen a dramatic rise in the number of online and direct companies operating in this area, Mintel's research shows that two-thirds of savings account holders use a branch to pay in money. Around 13% use the internet for transferring funds with 23% using it to check their balance.
Familiar brands
So although new entrants are having an impact on the sector, many consumers still like the reassurance of a familiar brand name when depositing money into their accounts.
HBOS, with its network of companies, is the number one savings provider with a total of £124bn saved in its accounts by June 2004.
'It's about making it worthwhile to save, which means attractive rates of interest and a range of options when it comes to deposits and accessing cash - from branches, online or over the telephone,' says a Halifax spokesman.
HBOS has adopted a multi-brand strategy with Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance all coming under its umbrella.
Nineteen per cent of UK savers have an account with Halifax.
Lloyds TSB is the second-largest player, having successfully cross-sold to many of its current account holders.
Abbey, in third position, was the first building society to demutualise in 1989 and more recently has been through a major restructure and rebranding (from Abbey National).
But competition is fierce for savers' money, with the established names coming under pressure from direct companies such as ING Direct and Egg, online accounts such as Cahoot and Smile and brands such as the AA, Sainsbury's, Tesco and Saga extending into finance from other areas of expertise.
Last October, Sainsbury's Bank became the first financial services provider to offer a savings account that allows customers to make deposits at supermarket checkouts when paying for their shopping with a debit card. Shoppers using SaveBack are able to deposit as little as £1 into their account.
Egg gets ahead
In October 1998 Egg launched its savings account with a flat rate of 8% (leading the market at the time). Such was its success that its five-year target of 500,000 customers and £5 billion of funds was reached in just six months.
Egg has introduced a number of direct marketing innovations and has been especially adept at identify cross-selling opportunities, using a database that is updated daily. Today Egg is the world's largest purely online bank with 3.6 million customers.
More recently it has been ING Direct's performance that has been most closely monitored by rivals. It has been especially successful at attracting high value customers: it had about 690,000 customers by September last year with an average account balance of more than £25,000.
The company puts its success down to its simplicity. Gina Fusco, ING direct head of marketing, says: 'We treat all customers as equal. The account can be opened with as little as £1 and everyone benefits from same high interest rate (5%). There are no confusing bonus periods or catches. There are no restrictions on the number of deposits or withdrawals, no fees and no penalties.' ING Direct has also invested heavily in advertising to build awareness.
'Before our launch in 2003, ING Direct was completely unknown in the UK,' adds Fusco. 'We deliberately focused on heavy advertising and marketing when we entered the market to ensure significant cut-through at launch.
In addition to advertising, Fusco believes word of mouth is playing an increasing part in building the brand: 'We have a base of exceptionally loyal customers and a 98% advocacy rate.'
Although the standard of accounts differs widely, as with financial services as a whole, customer inertia means savings accounts are often held for years with many unaware what interest rate their account is getting. Just 2.5% of adults claimed to have opened a savings account with a different bank (1.5% for building societies) in the past year according to a TGI survey.
Rising rates
With further interest rate rises possible, savings will become more attractive, although any rise will have a less welcome effect on mortgage and credit lenders.
One of the most recent government-led initiatives to encourage savings has been the introduction of the Child Trust Fund. Introduced in the April 2003 Budget, it provides every child born in the UK after 1 September 2002 a minimum endowment of £250. This can be invested and added to by parents with the child gaining access to the funds when they reach 18.
In the short term Mintel expects the savings account market to experience strong growth with the number of major British banking groups and building society savings accounts estimated to grow in number by a third to 74 million by 2009.
NUMBER OF UK BRANCHES 1999-2003
2003 2002 1999 99-03
% change
1 RBS Group (incl. RBS & Natwest) 2277 2283 2360 -4
2 Lloyds TSB Group (Incl. C&G) 2238 2263 2529 -12
3 HSBC 1587 1615 1662 -5
4 HBOS 1105 1150 1259 -12
5 Abbey 753 766 765 -2
6 Alliance & Leicester 310 310 319 -3
7 Bradford & Bingley 204 211 223 -9
8 Northern Rock 56 76 76 -26
Total 10,600 10,754 11,497 -8
Source: BBA/BSA/Mintel
HIGHEST-SPENDING ADVERTISERS 2002-04
02/03 02/03-
03/04 03/04 pounds -03/04
£000 % share 000 % change
1 ING Direct 13,987 34 3916 257
2 Abbey 6214 15 997 523
3 Halifax 5568 14 3271 70
4 Zurich Financial Services 1924 5 1246 54
5 Egg 1447 4 71 n/a
6 Nationwide 1335 3 51 n/a
7 NS&I 1161 3 1046 85
8 Alliance & Leicester 1123 3 1046 7
9 Bank of Scotland 1011 2 514 97
10 First Direct 851 2 353 141
11 Others 6576 16 8578 -23
Total 41,196 100 20,672 99
Source: NMR/Mintel
ANALYST COMMENT
Jason Gibbs, Financial services account manager, Acxiom Data
While savings accounts are perhaps at the 'simpler' end of the financial services marketplace, there is still a dizzying array of savings options open to consumers.
In reality, though, there is very little difference between one savings product and another, other than longer lock-in conditions, levels of risk and, most importantly, interest rates. These may not vary hugely, but they are key factors when it comes to choosing a product. Some consumers will also consider holding their savings with their current account provider as it makes it easier to switch money between accounts.
Acxiom data reveals that most savers have income levels above the national average, with a significant proportion earning more than £35,000. They are likely to own their own home and be married or living with a partner.
Many products target particular age groups and this too shows in the data. Guaranteed income bonds and National Savings accounts, for example, are over-represented in the over-65 age bracket. Older savers have a greater need for financial security and like the idea of a guaranteed income and a trusted brand.
Standard savings accounts have youth appeal, with the greatest take-up among 25- to 34-year-olds, building society accounts and savings plans are popular in the 35-44 group, while lump sum investments and ISAs are especially well-subscribed to by 55- to 64-year-olds.
The simpler savings products are 'starter' investments for younger consumers who add more complex products as they get more confident in their financial knowledge. The younger saver is prepared to take more risks, while the older saver is looking to consolidate their savings portfolio into a safe investment.
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