New banks raise savings yields as the Bank of England raises interest rates

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The Starling Bank app is displayed on the person’s phone.

Adrian Dennis | AFP via Getty Images

LONDON – Online banks in the United Kingdom are racing to boost revenue from their savings accounts in a bid to woo cash-strapped savers after the Bank of England raised its record interest rate for the ninth time in a year.

After announcing a new rate hike on Thursday, Starling Bank and Chase UK, the British rival brand from US banking giant JPMorgan, took steps to capitalize on the move.

Chase UK said it would increase the variable AER, or equivalent annual rate, on its savings account to 2.7% from 2.1% from January 4, 2023.

On Thursday, Starling rolled out its first savings product, a fixed-term deposit account that offers a guaranteed return of 3.25% after one year on balances ranging from £2,000 ($2,439) to £1 million.

A Starling spokesperson said: “Starling has been growing and developing its products and features in response to customer demand and needs since launching its app five years ago.”

They added, “We are adding to our product range all the time. Just this week we launched the Virtual Cards in addition to our Fixed Savings Account.”

The Bank of England on Thursday raised its main interest rate by 50 basis points, to 3.5%, its highest level in 14 years. The British central bank is seeking to curb soaring inflation, which is near a 41-year high.

High rates are good for savers but bad for borrowers. It means savers can get higher rates of return on their deposits. However, those who have mortgages, credit cards, and personal loans to pay are charged higher interest.

“We’re back in the era when banks used better savings rates to acquire clients,” Simon Taylor, head of strategy at fintech startup Sardine.ai, told CNBC.

“Those who can move quickly will, the rest will follow when their systems and processes allow them to do so.”

Deposit incentives from new banks can well affect corporate profitability. Fintech is known for its unprofitable companies, which tend to prioritize rapid growth over making money in the short term.

Chase expects to lose $450 million in its offshore digital bank in 2022 and a similar amount in the next few years before it breaks even in 2027-28.

For its part, Starling announced its profits for the first year in the fiscal year ending in March 2022 after its loan book grew significantly.

We have moved from a world where lending was cheap and deposit rates were low to a world where lending was expensive and deposits generated higher returns, Taylor said.

“It could be said that the wave of rival banks is making it more competitive,” he added.

This is not the first time that an internet-based bank in the UK has taken savings rates to higher levels.

First Direct, a subsidiary of HSBC, this month began offering 7% interest, provided customers deposit between £25 and £300 per month up to a maximum of £3,600, and cannot withdraw for a year.

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