Thrifty customers are taking revenge on banks for years of zero interest when their current accounts are in credit.
They are piling billions into accounts paying a higher return, new analysis shows, giving banks a headache.
Credit agency Moody’s revealed that lenders’ profits are being squeezed by the trend. It points to Bank of England figures showing that over the past year £5 billion has been pulled from non-interest paying current accounts, while £50 billion has gone into deposit accounts that do pay interest.
Current accounts have traditionally been a cheap source of funding for banks and building societies. That is because lenders’ key source of profits is the gap – or margin – between the interest rates they charge to borrowers and the rates they have to pay out to savers.
In recent years banks have been criticised by MPs for being ‘ungenerous’ with the rates on offer to depositors.
Savvy: Customers are piling billions into accounts paying a higher return, new analysis shows, giving banks a headache
The accusation was banks were quick to raise the interest charged to borrowers when the Bank of England started hiking rates, but much slower to pass on benefits to savers.
Now it appears that the tables have turned. Bank of England figures published last week show that in March alone households deposited £8.5 billion with banks and building societies. That was the highest net inflow since October 2022.
Of this, £1.6 billion went into instant access savings accounts and £2 billion into ‘term deposits’ – which typically pay higher interest if they are left untouched for a fixed period.
A further £3.2 billion went into Isas – a trend that often happens in March as it is the end of the tax year.
But a net £640 million was withdrawn from non-interest paying current accounts.
The Moody’s report said: ‘UK banks have traditionally been funded by personal current accounts, which pay no interest and are a cheap source of funding for them. A shift to longer interest-bearing term deposits from interest-free deposits indicates banks’ margins will be pressured.’
Moody’s said UK banks had enjoyed ‘exceptionally strong’ profits in 2023 due to high Bank of England rates but it now expected margins ‘to come under pressure from competition in the mortgage market’.