Savings account for existing customers only

book12

I know some banks and building societies only let existing customers with current accounts to open savings accounts, especially regular savers and e-savings. Why is that?

It's quite unfair for customers to open a current account just to qualify for the savings account at the other bank. Why don't banks open a savings account for new customers without having them to apply for a current account in order to qualify for a savings account, especially e-savings and regular savers.

Also, people who don't score well to open a current account in order to open a savings account at that particular institution, they will be declined all together (current account and savings), which is also unfair....

Some examples include:

• Lloyds TSB - you must have a current account to open an e-savings or regular saver
• nationwide - must have a current account to have an e-savings
• barclays - must have current account to open regular saver

There are loads of othe banks that open savings accounts to existing customers, but those are the three above that I could think of for the time being.

Also, basic bank account customers won't qualify for savings account becuase they must or need a current account with the savings account (correct me if I'm wrong)?

Robert_Sterling

Some savings accounts do not themselves generate profit for a bank.
e.g. A 10% regular savers account.
So only someone with a Current Account may be allowed to open a Regular Saver Account.

grumbler

Most of e-savings accounts can be linked only to a current account with the same bank. This is just the way they operate. I don't see anything unfair in this. One of my current accounts with Nationwide is a basic (?) account with a cash card, no chequebook and no overdraft. I have the e-savings account linked to this basic account. No problems.

Regarding 8%-10% Regular Savings acconts, not only they don't generate profit for a bank, but in fact they generate losses. The only purpose of these accounts is to lure potential customers into opening current accounts with the bank or to retain existing current account holders.

Limes

grumbler wrote:

Most of e-savings accounts can be linked only to a current account with the same bank. This is just the way they operate.

This is simply not true. Of the 25 Internet only operated instant access savings accounts (I realise there are many more that can be operated across different channels) currently available for new customers, only 3 require you to be an existing customer - have a linked current account specifically with them; Barclays e-Savings (and I'm not sure if I didn't read somewhere recently that they will be removing this condition), Nationwide e-Savings and Norwich and Peterborough BS Netmaster Gold. Of course most require a link to a current account as sometimes the money has to be used or moved and a savings account doesn't necessarily provide the same functionality that you get with a current acount.

grumbler wrote:

Regarding 8%-10% Regular Savings accounts, not only they don't generate profit for a bank, but in fact they generate losses. The only purpose of these accounts is to lure potential customers into opening current accounts with the bank or to retain existing current account holders.

Again, not necessarily true it depends on your definition of generating a loss. Yes the product itself may be unprofitable but a bank will not look at this in isolation if it can be proved that by maintaining this type of relationship with a customer they can generate much more profit in cross-selling other products or protecting revenue from a customer's existing holdings - but I guess that's the point that was being made. . . there would be no point in retaining existing customers or luring potential customers to open accounts if there was no value to be extracted from somewhere.

Also, the loss being made by some of these regular saver type accounts isn't really that great at all. Consider HSBC's Regular Saver 2. Here is an account that on paper says you can earn up to 8% AER/Gross for 12 months. The conditions on the account mean that if you are putting the £250 per month into the account that earn the 8%, By the end of the year you will in fact only have earned £134 more than the total sum you will have invested in the period the account runs (£3k) - this is more like a 4.43% return - less than their online saver account. Now if you include the fact that you can invest up to £1,000 per month in this account which is eligible for a rate of 4.25% on anything over the initial £250, then by the end of the year you have only earned £337 on an investment of £12k - equivalent to a 2.81% return, which is far below any normal instant access account worth its salt these days. I realise that there are a couple of naive assumptions in these figures - i.e. 1) all calculations have been done in terms of gross interest, actual return will be even less after tax 2)this assumes that you have the lump sum available to invest all at once and for some reason have chosen not to put it somewhere that it can earn interest until it is able to be fed into the account - which is nuts (!!), but the long and the short of it is that banks aren't losing as much money on these type of accounts as you might think.

grumbler

Limes wrote:

This is simply not true. Of the 25 Internet only operated instant access savings accounts ...only 3 require you to be an existing customer - have a linked current account specifically with them

Well, I stand corrected in this:o

Yes the product itself may be unprofitable but a bank will not look at this in isolation if it can be proved that by maintaining this type of relationship with a customer they can generate much more profit in cross-selling other products or protecting revenue from a customer's existing holdings - but I guess that's the point that was being made. . . there would be no point in retaining existing customers or luring potential customers to open accounts if there was no value to be extracted from somewhere.

Am I right in understanding that you don't argue and agree with me?

Also, the loss being made by some of these regular saver type accounts isn't really that great at all. Consider HSBC's Regular Saver 2. Here is an account that on paper says you can earn up to 8% AER/Gross for 12 months. The conditions on the account mean that if you are putting the £250 per month into the account that earn the 8%, By the end of the year you will in fact only have earned £134 more than the total sum you will have invested in the period the account runs (£3k) - this is more like a 4.43% return - less than their online saver account.

This was discussed many times here. See, for example, Regular Savings Accounts discussion. Yes, loss for a bank is not great. However, your calculations are wrong. If you have £3K lump sum and put £250 p.m. into RS account, where do you keep the rest? If it is 4.75% Online Saver, then by moving £250 p.m. from OS to RS you make extra about £53 gross p.a. This is your extra profit and the bank's loss. And the AER of this combination of two accounts is about 6.51% - much more than your 4.43% figure.
If you don't have a lump sum and put £250 p.m. into RS instead of OS, your earn exactly 8% on all your money saved in this account during a year. Again, you will earn extra about £53 gross more than if you used OS (about £77 gross) instead of RS (about £130 gross). £53 is not a small addition to £77 - extra 68% in fact ...

Now if you include the fact that you can invest up to £1,000 per month in this account which is eligible for a rate of 4.25% on anything over the initial £250, then by the end of the year you have only earned £337 on an investment of £12k - equivalent to a 2.81% return, which is far below any normal instant access account worth its salt these days.

Your logic is absolutely incorrect. If you invest £1000 p.m. you earn 8% on £250 and 4.25% on £750. Again, if you have £12K available at start, I think you wouldn't keep the remainder under a mattress during a year (or on some 0.1% current account). Let alone the fact that there is no point in putting £750 p.m. into 4.25% account while you can put the whole £11750 into 4.75% OS.

I realise that there are a couple of naive assumptions in these figures

I'd say that these assumptions are not naive, but wrong and misleading.

P.S. 4.75% Online Saver here is just an example. I know about lost interest in any month you make a withdrawal. There are a lot of other instant access accounts around without penalties.

Limes

Okay. . . I didn't really find anything particularly relevant on that link you provided in your reply though. . .

AER is the advertised rate for the year if the interest was compounded on an annual basis for a lump sum, but because there are incremental additions being made to the account, the interest earned - although at the same rate - will provide a different amount of returned interest for each tranche of £250 or £750 or £1k, whichever is being put into the account each month. So, for the first month you would earn 8% on that £250, on the second month although the rate is still 8%, you are only earning 11 months of interest on that and so on down to month 12, so effectively your return is (okay I realise interest is calculated daily so there is going to be some slight difference but as a ball park calculation I believe this works):

250x8% = £20
+250x((8%/12)x11) = £18.33
+250x((8%/12)x10) = £16.67
+250x((8%/12)x9) = £15.00
+250x((8%/12)x8) = £13.33
+250x((8%/12)x7) = £11.67
+250x((8%/12)x6) = £10.00
+250x((8%/12)x5) = £8.33
+250x((8%/12)x4) = £6.67
+250x((8%/12)x3) = £5.00
+250x((8%/12)x2) = £3.33
+250x((8%/12)x1) = £1.67

Total interest on this basis is £130, which as a percentage of £3k is 4.33%. You have still earned your 8% AER/Gross on your investment but your actual return is significantly less.

I also did mention that was quite a simplistic view and would have to assume that nobody would leave money sitting doing nothing if it wasn't able to be put into the account.

I'd be glad to take a look at how you'd work the interest out and concede "defeat" then!!!

I hope you understand that my comments in my last and this message were made with the most respectful of intentions. I realise they may have come across a little forward and apologise for any offense caused. (Now I sound all self-righteous. . . sorry about that too!!!)

grumbler

Limes wrote:

Total interest on this basis is £130, which as a percentage of £3k is 4.33%. You have still earned your 8% AER/Gross on your investment but your actual return is significantly less.

Less than what? See more detailed explanation below.

I also did mention that was quite a simplistic view and would have to assume that nobody would leave money sitting doing nothing if it wasn't able to be put into the account.

This simplification is very misleading.

I'd be glad to take a look at how you'd work the interest out and concede "defeat" then!!!

I used the approximate formulae posted in the thread I quoted above.
And now more detailed explanation.

A. You have £3000 lump sum.

A1. You keep it in 4.75% account. Annual gross interest is £3000*4.75%= £142.5

A2. You keep it in 4.75% account and move £250 every month to 8% account. Annual gross interest is £3000*(8%*6.5+4.75%*5.5)/12=£195.3. Extra interest is £52.8

Effective AER is 4.75% for A1 and 195.3/3000=6.51% for A2

B. You don't have a lump sum and save £250p.m. (at the beginning of every month) from your income.

B1. You put £250 p.m. into 4.75% account. Annual gross interest is £250*6.5*4.75%=£77.2

B2. You put £250 p.m. into 8% RS account. Annual gross interest is £250*6.5*8%=£130. Extra interest is exactly the same: £52.8

Average balance is £250*6.5=£1625.
Effective AER is 77.2/1625=4.75% for B1 and 52.8/1625=8% for B2.

Calculation £130/£3000=4.33% is incorrect and misleading because it refers to neither A nor B. This calculation in fact discribes some nonsensial strategy when you have £3K lump sume at start, keep it 'under mattress' and move £250 p.m. from this place to 8% RS account.

I hope you understand that my comments in my last and this message were made with the most respectful of intentions. I realise they may have come across a little forward and apologise for any offense caused. (Now I sound all self-righteous. . . sorry about that too!!!)

No offence. I understand that you were driven by good intentions and was mistaken (IMO). I am doing my best trying to make you change your mind.:beer:

Limes

I agree with your calculations on the basis that you described, but the points that I was originally making were that the high interest regular saver account type on its own was not a sound, sensible option for savers as well as the fact that the way the product is structured minimises the losses made by the banks, which are offset by other business areas anyway.

I made no attempt to include it as part of a strategy involving the use of online saver (or other accounts) as well. There are a lot of learned individuals on this forum who would naturally consider a strategic approach to maximise returns (I of course exclude myself from the learned category) but I bet there are a lot of "Newbies" who may not have necessarily considered this type of strategic approach and may have therefore been attracted by the high rates offered without much regard to the effects of these accounts on their returns. There is evidence of this non-strategic approach amongst relatively new savers in the thread you linked to with a Halifax Regular Saver customer (7% AER) who was shocked to only get £91 interest after tax (£113 before - which ties in with the way I calculated - but no more of this!!!) . . . and in the meantime the banks continue to be better off than people may think because their supposed loss-leading regular saver accounts aren't so loss-leading after all.

. . . I'm kind of under the impression that (calculations aside) we've been arguing the same side of the argument.

Friends again?:beer:

book12

When I read the banks website, it says the savings account are for new and exisiting customers who have or will apply for a current account. How come basic bank account customers are not involved in this?

Limes

Well, it's definitely not due to the fact that there are functional differences in how the basic current account operates compared to normal ones. Most will provide the same ability to bank online and set up standing orders and direct debits.

This is more likely than not to be driven by customer value. Generally those with basic accounts are not going to be of significant value to a bank - low levels of funding in basic accounts mean that the banks can't extract any value from other cross-sold/cross-held products as there would be very little to no appetite or take-up of other products by these account holders, theoretically at least.

The principle of the basic current account is more one of banks under duress having to comply with regulation/legislation of one sort or another requiring financial institutions to make provision for the less financially privileged to current account facilities rather than an overwhelming feeling of social responsibility.

The long and the short of it all, as alluded to elsewhere in this thread is that banks like to make money and will focus efforts on areas of their business where profit can be extracted and create ways of getting to this through focussed product development, often to existing customers because its cheaper to attract their attention, or to new ones on conditions of other products being held because again it provides a wider revenue stream from the customer.

So, to conclude(!) basic account customers are not profitable enough. Fairness has little place in Banking on this basis, regardless of what the Banking Code et al have to say on the matter. The argument may well be made by certain institutions that this is of little consequence because savings products (although at nowhere near as high a rate as some accounts)are available elsewhere that people with basic current accounts can access and therefore they are under no obligation to provide the product to all and sundry.

To sign up to any product or service the purchaser has to fulfill certain acceptance criteria, if a consumer is unwilling to abide by the terms and conditions then their application/purchase is invalidated - tough news to those who can't abide by the Ts & Cs just because they can't and not because they choose not to I guess!

This is not an anti-bank tirade. . . I promise!