Product and Pricing Trends in UK deposits and ISAs

This report specifically analyses the retail deposits and ISA market in the following segments: ordinary savings accounts, regular savings accounts, Mini cash ISAs, current accounts, and foreign currency accounts.



Report Highlights
Consumers continue to be almost twice as likely to place their assets in deposits as in the next most popular savings and investments product, direct equities. The value of deposits at the end of 2006 stood at GBP834.4bn, from a total savings and investments market value of GBP1,787.1bn in the UK. The dominance of ordinary savings accounts in the UK deposits market has continued its decline. At January 2007 this segment accounted for 59.2% of the total deposits market, down from 62.6% in February 2006, and down from 66.1% from February 2004. The popularity of ordinary savings accounts is slowly dissipating into other segments of the market. In a comparison between the distributors of Mini cash ISAs, it is clear that in January 2007, banks were the leading providers of accounts without a notice period. Building societies did offer a significantly higher proportion of instant access accounts than banks did, 45% of their total offering as opposed to just 27% of all banks’ Mini cash ISAs.


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EXECUTIVE SUMMARY 4
Introduction 4
Market context 4
Product trends in UK deposits and ISAs 5
Product segments 5
CHAPTER 1 INTRODUCTION 11
What is this report about? 11
Who is the target reader? 11
How to use this report 11
CHAPTER 2 MARKET CONTEXT 13
Introduction 13
The deposits market still represents almost half the total UK retail savings and investments market 14
Net deposits inflows bounced back in 2006 while inflows into direct equity declined 14
Datamonitor anticipates consistent growth in the deposits market over the next five years 15
The ISA market continues to go from strength to strength 16
Total ISA sales continue to grow albeit at a slower rate than in 2005 16
Mini ISAs remain the key component of the ISA market, with cash ISAs the most popular form of Mini ISA 17
Almost all sales of Maxi ISAs are in the form of stocks and shares 18
New ISA subscriptions have consistently risen from a low in 2003 19
The average value of new ISA subscriptions continues to rise with Maxi ISA and stocks and shares Mini ISAs rising fastest 20
A market correction during the next five years is expected to signficantly affect ISA sales growth 21
Data tables 23
CHAPTER 3 PRODUCT TRENDS IN UK DEPOSITS AND ISAS 27
Introduction 27
Key findings 27
The product segments continue to slowly diversify but ordinary savings accounts still comprise over half the market 28
Ordinary savings account numbers are declining but the segment is not necessarily easier for consumers to navigate 29
Regular savings accounts continue to grow in popularity among providers 29
In the foreign currency segment, offshore USD accounts are growing, threatening the dominance of offshore Euro accounts 29
Current accounts with an overdraft continue to outstrip those without 30
Product providers are taking notice of the changing demands of consumers in terms of distribution channels 30
No notice or instant access accounts make up the majority of all ordinary savings accounts 30
Sight deposits are increasingly popular with consumers as time deposits fall out of favor and cash ISAs see significant growth 31
Direct banking's popularity has waned slightly over the year in terms of the number of accounts offered 32
Online savers have access to better rates and are able to make lower initial deposits 34
Building societies are achieving greater parity with banks in terms of product range diversity 34
More top competitors are tying products together to increase their share of their customers' wallet 35
Offsetting or pooling savings is set to become more prevalent 36
Pricing has become more cutthroat as providers up the competition for new business 37
Increased competition and consumer demand may turn the tide against complex pricing 37
Data tables 38
CHAPTER 4 PRODUCT SEGMENTS 41
Introduction 41
Key findings 41
Ordinary savings accounts are declining but still dominant in the savings and deposits market 43
Notice periods continue to come down in ordinary savings accounts 43
Tiered pricing is still prevalent among building society accounts but banks are simplifying pricing structures 44
Pricing schemes aim to retain existing customers and partition the client base 45
Bonuses are key to retaining existing customers 46
Providers are offering a range of differently priced accounts with graduated minimum balance thresholds 46
The average interest rate offered on ordinary savings accounts has risen over the past year 46
The popularity of different distribution methods varies between banks and building societies while also affecting pricing levels 48
Newer distribution strategies offer the most competitive pricing to customers 48
Branch only distribution remains strong despite small increases in the number of direct access accounts 49
The number of regular savings accounts grew by 11% between February 2006 and January 2007 50
Building societies are strengthening their control over regular savings accounts 50
Three of the four new entrants to the market in 2006 were building societies 51
Building society regular savings accounts cater to either end of the notice period spectrum, while banks tend to offer mid-range notice periods 51
There is a signficant difference between banks and building societies in the pricing of regular savings accounts 52
Fixed rates' popularity has stalled over the past year but continue to offer eye-catching rates 53
Mini cash ISAs remain in high demand 53
Mini cash ISAs are slowly moving towards longer notice accounts, while also maintaining a trend for no-notice accounts 54
Banks are more likely to offer Mini cash ISAs with no notice period 55
Fixed rates are becoming more common but are strongly tied to long term Mini cash ISAs 55
Interest rates are not keeping pace with the base rate but gradually improve with increased investment 56
Distribution is focused on the branch network, but banks offer a wide range of access options 57
Current accounts with overdrafts remain the key sub segment of the current account market 58
Current accounts with overdrafts are seeing some changes to product features 59
Interest rates vary widely and rarely reflect the Bank of England base rate 59
Funding requirements are particularly common among building societies although banks have embraced account fees 60
Building societies are creeping into this segment 60
Non-overdraft current accounts are aimed at niche markets 61
There is a broad range of distribution options available for current accounts with an overdraft 62
The intended immediacy of current accounts is emphasized by the relative popularity of telephone and internet banking 62
Several varieties of foreign currency account are available but these vary signficantly in popularity 63
Clearly tiered interest rates reward serious savers while offshore rates beat onshore equivalents 63
Onshore Euro current accounts are unlikely to offer interest rates 64
Similar distribution of notice periods in the offshore accounts reflect the similarity of the offerings in each market 65
Data tables - ordinary savings accounts 66
Data tables - regular savings accounts 68
Data tables - Mini cash ISAs 70
Data tables - Current accounts 71
Data tables - Foreign currency accounts 72
CHAPTER 5 APPENDIX 74
Definitions 74
Average interest rate 74
Base rate / discount rate 74
Deposits 74
Investment trusts 74
ISAs and Mini cash ISAs 74
OEICs 75
Unit trusts 75
Research methodology 75
Further reading 76
Datamonitor Savings & Investments SPP Reports 76
SPP writing team 77

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Table 1: UK retail deposits and savings, 2002-2006 23
Table 2: Net inflows into UK retail deposits and savings, 2002-2006 23
Table 3: Forecast UK retail deposits and savings, 2007-2011 23
Table 4: Gross ISA sales in the UK, 2002-2006 (GBPm) 24
Table 5: Gross Mini ISA sales in the UK, 2002-2006 (GBPm) 24
Table 6: Gross Maxi ISA sales in the UK, 2002-2006 (GBPm) 25
Table 7: Number of new ISA accounts opened in the UK by account type, 2002 - 2006 25
Table 8: Average value per subscription of selected ISA types, 2002 - 2006 26
Table 9: Forecast annual ISA balances by stocks and shares and cash, 2007 - 2011 26
Table 10: Market segmentation by number of accounts, 2006 and 2007 38
Table 11: Notice period by type of institution, with comparison to 2004 total data 38
Table 12: Total UK personal deposit balances by holding institution and type, 2001 - 2005 39
Table 13: Proportion of ordinary savings accounts operating by each method 39
Table 14: Average number of accounts offered by banks and building societies, January 2007 40
Table 15: Ordinary savings accounts by notice period, Feb 1999-Jan 2007 66
Table 16: Tiered and non-tiered interest rates on ordinary savings accounts split by institution, January 2007 and February 2006 66
Table 17: Average interest rates paid on ordinary savings accounts in February 2006 and January 2007, by level of investment 67
Table 18: Average interest rate paid on ordinary savings accounts, January 2007, segmented by distribution strategy 67
Table 19: Distribution channels of ordinary savings accounts, February 2006 and January 2007 68
Table 20: Regular savings accounts split by provider type 68
Table 21: Notice period of regular savings accounts by provider type, January 2007 69
Table 22: Average interest rate paid on regular savings accounts, by notice period, January 2007 69
Table 23: Mini cash ISA accounts by notice period, January 2007 70
Table 24: Mini cash ISA accounts by notice period and distributor, January 2007 70
Table 25: Interest rates offered in Mini cash ISAs by tier and distributor, January 2007, including comparative Bank of England base rate 71
Table 26: Proportion of accounts by distribution method and distributor, January 2007 71
Table 27: Interest rates paid on current accounts by level of investment and distributor, January 2007 71
Table 28: Proportion of current accounts with overdraft by distribution method and distributor, January 2007 72
Table 29: Foreign currency account market size, January 2007 72
Table 30: Interest rates available on foreign currency savings accounts by investment tier and denomination of account, January 2007 72
Table 31: Foreign currency accounts by notice period, January 2007 73


Figure 1: Deposits continued to show good growth relative to the rest of the UK S&I market between 2002 and 2006 14
Figure 2: Net inflows for deposits remained strong in 2006 while 15
Figure 3: The deposits market is forecast to grow significantly over the next five years 16
Figure 4: Total sales of ISAs continued to rise in 2006 although growth has slowed since 2005 17
Figure 5: Cash ISAs continue to be the most popular form of Mini ISA 18
Figure 6: Stocks and shares traditionally account for the vast majority of Maxi ISA sales 19
Figure 7: The total number of new ISA subscriptions has risen steadily since 2003 20
Figure 8: The average value of all forms of ISA subscription has risen between 2002 and 2006 21
Figure 9: ISA balances will have mixed fortunes over the next five years 22
Figure 10: The market continues to slowly shift away from ordinary savings accounts between 2006 and 2007 28
Figure 11: Longer notice periods for ordinary savings accounts are becoming less common, particularly among banks 31
Figure 12: Sight deposits with banks alone now account for almost half the UK deposits market value 32
Figure 13: Between February 2006 and January 2007, the number of accounts operated online and by telephone decreased slightly 33
Figure 14: Building societies had a larger number of available accounts than banks in January 2007 35
Figure 15: There has been a continuous shift towards shorter notice periods over the past eight years 44
Figure 16: The number of non-tiered accounts among banks have risen between 2006 and 2007, while among building societies tiered accounts have gained ground 45
Figure 17: Average interest rates on ordinary savings accounts grew significantly between February 2006 and January 2007 47
Figure 18: The distribution channels used have a significant impact on the pricing of ordinary savings accounts 48
Figure 19: The proportion of branch-only ordinary savings accounts grew slightly between February 2006 and January 2007 49
Figure 20: Building societies have taken an additional 2.2% of the total regular savings account market between February 2006 and January 2007 50
Figure 21: Instant access is the most popular form of regular savings account among both banks and building societies in 2007 52
Figure 22: Pricing on regular savings accounts varies considerably depending on the notice period on the account 53
Figure 23: Instant access and no notice ISAs have declined slightly this year while notice periods of a year or more have risen 54
Figure 24: Banks offer significantly more Mini cash ISAs without a notice period than building societies 55
Figure 25: Building society interest rates tend to be set slightly higher than those of banks although both on average are lower than the Bank of England base rate 57
Figure 26: Branch access to Mini cash ISAs remains dominant 58
Figure 27: Current account interest rates do not reflect the base rate and do not reward high balances 59
Figure 28: Banks still form the majority of providers and offer the largest proportion of current accounts in January 2007 61
Figure 29: Current accounts with overdrafts offer a wide range of access methods 62
Figure 30: The offshore sub segment was far larger than the onshore foreign currency account market in January 2007 63
Figure 31: Offshore USD accounts offer the highest interest rates among offshore foreign currency savings accounts 64
Figure 32: The proportion of no notice accounts is higher among offshore accounts than onshore Euro accounts 65

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