New market research by £19.6 billion savings platform Flagstone* exposes why UK small and medium sized businesses (SMEs) continue to prefer to save with high street banks (e.g. Barclays, Lloyds, HSBC) over challenger or online alternatives (e.g. Allica, Starling, Tide, Monzo), despite the inferior rates the former can offer.
The research** finds that 73% of SMEs save mostly or entirely with high street banks, 13% prefer a 50:50 mix of high street and challenger banks and 13% save mostly or entirely with online or challenger banks.
This stark preference for high street savings providers persists in spite of the fact that an SME saving exclusively with high street banks could earn on average as much as 237% less than they might with challengers.
Flagstone compared rates currently available to SMEs from four of the UK’s largest high street banks and four UK challenger banks offering the most competitive business savings rates***:
| Savings account type | Avg rate offered to SMEs by a high street, traditional bank | Avg rate offered to SMEs by a challenger bank | Difference |
| Instant access | 1.15% | 3.87% | 2.72% |
| 6 month fixed term | 2.25% | 3.80% | 1.55% |
| 12 month fixed term | 2.60% | 3.95% | 1.35% |
The impact of this interest gap on business savers is startling:
- For an average micro business (1-9 people) with £66,232 in instantly accessible cash reserves, this equates to £1,801.51 per annum in lost interest.
- For an average small business (10-49 people) with £224,673 in instantly accessible cash reserves, this equates to £3,482.43 per annum in lost interest.
- For a mid-sized business (50-249 people) with an average £620,734 of instantly accessible cash reserves, the missed interest opportunity amounts to £8,379.91 per annum.
What prompts this preference? Four key reasons emerge:
An SME’s perception of what’s safe – particularly when the portfolio balance exceeds FSCS limits
- 63% of all SMEs prefer to save with high street banks over challengers because of the perception that they are safer. This increases as companies:
- Get bigger (73% of mid-sized SMEs agree)
- Have more to save (83% of those with £500,000 or more in cash agree)
- Manage more savings accounts (78% of those with 4+ savings accounts agree)
- Maintain savings accounts with more banks (87% of those saving with 4+ banks agree)
Protection comes first, before returns
- 75% of all SMEs believe it’s more important to prioritise safety and protection of their companies’ cash, even if that means generating lower returns
- 60% say that high rates alone are not enough to convince them to switch banks
Newer savings providers haven’t yet won full trust
- 61% prefer to save their companies’ cash with established high street banks, even if the interest rates they offer are lower than what the challenger banks provide
- 68% agree they would consider saving their companies’ cash with challenger banks if they were more confident in their track record
Alongside safety, convenience matters too
- 60% know they could use a number of different banks (including high-street and challenger banks) to spread risk and maximise returns, but believe they haven’t the time or find it too complicated to manage.
- 75% prefer to save their companies’ cash with their main provider for day-to-day banking
Lakhbir Sandhu, CFO of Flagstone: ‘When the vast majority of UK businesses continue to favour traditional banks despite rate competition driven by challenger banks, it sends a clear signal: rates alone aren’t enough to encourage businesses to change their savings habits. The deeper we dig into the data, the clearer it becomes that SME finance leaders are looking for a number of benefits from the savings providers they use: trust, return, convenience and flexibility.’
Many SMEs exceed FSCS protection limits
Despite this widely held view among SMEs that the safety of their cash is of prime importance, the vast majority fail or choose not to adhere to Financial Services Compensation Scheme (FSCS) rules. Under FSCS, an account holder should not hold more than £120,000 with a single banking group. Should they do so and that bank fails, their cash is not fully protected.
The research reveals that:
- 2 in 5 small SMEs’ cash reserves are not fully protected by FSCS
- the average small SME has £225,000 in two or fewer savings accounts, but 43% admit to saving all their cash with only one bank
- At least 85% of mid-sized SMEs’ cash reserves are not fully protected by FSCS
- the average mid-sized SME has £621,000 in cash; 85% of them save that cash among three or fewer banks
Sandhu: ‘When over 4 in 5 SMEs with over £600,000 in cash save with three or fewer banks, it’s unlikely they are achieving full FSCS protection. However, when risk mitigation ranks so highly among SMEs, finding ways to ensure adequate FSCS protection on their cash should be a priority for finance leaders. While the financial services industry has more guard rails than ever, it’s not a market exempt from risk.’
