Rethinking cash: what you need to be doing with your deposits

According to the latest figures from the British Bankers’ Association (BBA), the UK’s small and mid-sized enterprises (SMEs) are saving more. SME cash deposits have grown by 7 per cent over the last year to £164bn (Q4 2015) – up from £161bn in Q3, £157bn in Q2 and £151.6bn in Q1[1].

Most of these businesses (96 per cent) bank with the big five[2] who, if it were possible, are actually paying worse rates than they were a year ago, with Barclays, HSBC, RBS (including NatWest) and Lloyds all paying zero per cent[3]. Santander is the only major bank currently paying any interest for business’ cash deposits and it is only offering 0.25 per cent – significantly less than the market-leading rate. Despite this, the big four have lost just 1 per cent of market share in the business current account market since 2012[4], with seven in ten (70 per cent) businesses not having switched their provider in more than 10 years[5].

Our analysis of cash deposits and interest rates reveals that SMEs in the UK were paid about £24 million in interest from the five largest banks last year. While this may sound like a substantial sum, when you consider that they could have received over £1 billion over the same period if they’d kept their money in the best instant access account (Aldermore who’s currently paying 1.1% AER) [6], it comes as a bit of a damp squib. What’s more is that if they’d put their cash in the highest paying notice account from Cambridge and Counties Bank (1.8% AER, 120 days’ notice)[7], they would have been £1.7 billion better off.

Most of the business owners we come across are aware that keeping all of their cash in one savings account is not only a risky move – particularly if they’re fortunate enough to have large cash holdings in the bank, as the FSCS limit only protects deposits up to £75,000 – but also a less lucrative one. The issue however, is inertia. Business owners simply don’t have the time to constantly be researching the best rates, moving money around and opening new savings account – or the money to pay their accountant or FD to do this. As a result, businesses are losing tens, even hundreds of thousands of pounds in interest every year, which could pay for a new member of staff or a significant investment in business infrastructure such as IT.

This is only compounded by the fact that many are under the false impression that in this low-interest rate environment, there are few attractive alternatives available. A little bit of digging will reveal that this is simply not the case. Even with interest rates anchored at 0.5 per cent and unlikely to change until mid-next year, there are several options available that will enable businesses to make more for their money; they just need to know where to look and be willing to manage their cash a bit more effectively.

There are plenty of higher paying instant access and fixed term accounts on the market and interest rates for business customers are changing faster than ever before as several new banks are competing for deposits and trying to establish themselves in the market. By all means, they can keep some of their cash with the big incumbent banks, but for risk (because of the £75,000 FSCS limit) and return purposes, they should consider spreading that cash across multiple accounts and could see between 2-5 times higher returns per annum as a result.

If businesses are concerned that rates being offered by challengers are just “teasers” designed to reel them in and will drop shortly after they’ve put pen to paper, I’d advise them to look into a cash management provider that will enable them to efficiently and electronically allocate their deposits to higher paying accounts, while spreading their money across a range of institutions so as to reduce risk through diversification.

So whether it’s thinking outside the box and looking to challenger banks, broadening their search of the high street and more established banks, or using new cash management solutions such as Flagstone, just be assured that better interest rates are there for the taking.

[1] The BBA. [2] Major banks’ SME business current account market shares taken from CMA/FCA – Banking services to small and medium-sized enterprise, July 2014. [3]Interest rates taken from and Flagstone. [4] CMA Retail Banking Market Investigation – pg.21 [5] CMA Retail Banking Market Investigation – pg.23 [6]Interest rates taken from and Flagstone. [7]Interest rates taken from and Flagstone.

By Andrew Thatcher, Founder and Managing Partner at Flagstone.

This article first appeared on Business Zone

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