UK Direct Banks 2007: Competitors for deposit-based funding

Higher interbank money market rates, which have resulted from the credit squeeze, are putting significant pressure on lenders to source funds. Unlike some traditional banks, direct banks may more insulated because they have large, fast growing deposit bases upon which to draw. This report explores their offerings.
Report Highlights

Between June and December 2007, Smile has consistently offered lower rates than its competitors, while Sainsbury's Bank has been the most consistent market leader by rate, with the exception of the months of July and August when Tesco offered the best rate, and November and December when the AA took the lead. A comparison between rates of high street banks and the accounts of direct banks suggests that, among traditional banks, only Abbey and, to a lesser extent, Lloyds TSB, are holding their own against their newer rivals. A comparison of average rates across the three categories of providers reveals that high street banks have consistently offered the highest average fixed rates, although since November, the gap between their average and that of rival direct banks and building societies has been narrowed.
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OVERVIEW 1
Catalyst 1
Summary 1
Methodology 1
EXECUTIVE SUMMARY 2
Direct banks present strong rate-based competition, particularly in the variable rate savings market 2
VARIABLE & FIXED DEPOSIT RATE TRENDS – DIRECT BANKS, HIGH STREET BANKS AND BUILDING SOCIETIES 6
Since August, deposit rates have stagnated 6
The market for fixed deposits sees increasing competition 15
VARIABLE AND FIXED RATE PRODUCT FEATURES – DIRECT BANKS 20
Online banks offer similar product features 20
Direct banks are developing their fixed investment ranges 28
APPENDIX 30
Definitions 30
Methodology 30
Further reading 31
Ask the analyst 31
Datamonitor consulting 31
Disclaimer 31
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Table 1: Highest deposit rates offered by direct banks, gross % p.a., monthly interest, Jun-Dec 2007 8
Table 2: Highest internet savings deposit rates offered by high street banks compared to the top three direct banks, gross % p.a., yearly interest, Jun-Dec 2007 11
Table 3: Highest internet savings deposit rates offered by building societies compared to the top three direct banks, gross %, p.a., yearly interest, Jun-Dec 2007 13
Table 4: Average variable deposit rates offered by direct banks, high street banks and building societies, gross % p.a., yearly interest, Jun-Dec 2007 15
Table 5: Highest fixed deposit rates offered by direct banks, gross % p.a., Jun-Dec 2007 16
Table 6: Direct banks’ variable rate savings account features – interest terms 21
Table 7: Direct banks’ variable rate savings account features – eligibility and access terms 26
Table 8: Direct banks’ fixed investment account features – interest and terms 28
Table 9: Direct banks’ fixed investment account features – eligibility and access terms 29



Figure 1: Since August 2007, most direct banks have held their savings rates constant 7
Figure 2: Abbey’s internet savings account offered the highest rate among high street banks 9
Figure 3: Only Abbey compares favorably to the top three direct banks by rate 10
Figure 4: Bradford & Bingley’s e-savings account holds its own against direct banks 12
Figure 5: Building societies offer strong rate-based competition in direct banking 14
Figure 6: Two direct banks have introduced new fixed rate deposits since June 16
Figure 7: High street banks offer comparable rates on fixed investments 17
Figure 8: Nationwide and Bradford & Bingley offer rates in excess of the average of direct banks’ rates 18
Figure 9: High street banks offer strong rate-based competition on fixed investments 19
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