Between 2020 and 2022, the US Federal Funds rate was 0.25% for two years. A mixture of expansionary monetary policy to spur spending along with a reliance on quantitative easing and high debt levels meant that low interest became the new normal. That was until a European war brought on an energy crisis and worryingly high levels of inflation. Rates shot up almost every month in the US until they . The UK followed suit, albeit a little bit behind the US, and has now reached 3%, whilst the EU has only just reached 2%. Even though these figures lag behind inflation in real terms, psychologically, it’s been the first time in years that high-interest savings accounts are an appealing number with substance. reached 4% in November For this reason, the term “neobank” is slowly being introduced to more people. When searching for which bank has the highest savings rate - a search that would seem nihilistic only last year - neobanks often arise in the searches because of their growing popularity and strong savings rates. What are neobanks Neobanks are what many dub a “challenger bank” or “online bank”, a fintech firm that focuses on its software and apps to streamline a more modern online banking experience. Usually, without any high street presence whatsoever, overheads are kept low, services are kept to a minimum, and efficiency, user-friendliness, and low cost are at the forefront of the business model. Neobanks sound like the future, but they’ve been around for a while. The likes of Starling and N26 were founded in 2014 and 2013, respectively, around the same time as many others. But since then, they only have around for personal current accounts in the UK, which is a similar story in other countries. 8% market share The reason for this could be a few things. Firstly, the older generation is technologically illiterate, and such neobanks are impossible to use without a smartphone and a basic understanding of how they work. Secondly, they are limited in what they can offer; many do not provide mortgages, lines of credit, overdrafts, and so on. Finally, there’s an element of familiarity with a high street bank - some people have been with their local branch for 30 years and do not see the need for change. That is, until now… More and more people use the internet to find the best services available to them, even if it’s non-tech local services like banking and insurance. And, in the current environment of central banks trying to encourage saving. The search for “best savings account” has gone up by 300% in volume on Google in the US since last Christmas. The last time the US Fed Funds Rate was this high was in 2008, a time when neobanks didn’t really exist. So, whilst neobanks have been around for a while and some people have stumbled upon them, this may be the first time when masses of people are looking to change banks since their creation. And, if customers find them to offer not just better interest rates but have a slicker user interface and overall experience, this could become the catalyst for a more substantial shift in market share. Comparing saving account interest rates between neobanks and high street banks Below is some research into the idea that neobanks do in fact offer higher savings rates, and as a result could see an influx of customers during the coming months. Bank interest rate US The average APY among high street banks in the US is around 3%. For example, Barclays, Capital One, and Marcus (Goldman Sachs) are all 3%. The current savings account bank interest rate for leading neobanks, however, is 2% at Chime, 4% at Current, 5% for Plus members at Aspiration, and between 2-5% at Varo. Bank interest rate UK For the UK, Lloyd’s Monthly Saver is 4.50% (0.70% for the current account), 1.2% for Co-ops Online Saver ( ), and for HSBC there are a comically vast number of accounts with savings rates . 2.31% for the 1yr Fixed Term Deposit ranging from 0.4% to 3.45% Out of the British neobanks, Starling doesn’t have a savings account (0.05% AER for the current account), 3.46% at Monzo, and 1.95% at Revolut. Bank interest rate Australia In Australia, AMP Bank’s Saver Account has up to 3.6 p.a. Ongoing variable bonus rate, whilst ANZ offers 2.15% for the ANZ Online Saver members. Ignoring the introductory 3.5% rate for 5 months at the Commonwealth bank, the standard GoalSaver account earns 2.55 p.a. When it comes to Australian neobanks, Up, Xinja, Volt Bank, and 86 400 are the noteworthy challengers to the big 5. Up Savers get a straightforward 2.85% p.a. once activated, whilst Xinja customers are getting 1.8-2.25% and 86 400 customers are getting 2.50%. Bank interest rate Canada Canada’s major banks include the Toronto-Dominion Bank, Bank of Montreal, Royal Bank of Canada, Canadian Imperial Bank, and Scotiabank. can be found, but watch out for the small print. Interest rates of 3% and even 4% Toronto-Dominion Bank offers a 1.40% interest rate to customers, whilst Bank of Montreal isn’t much better at . At the Royal Bank of Canada, customers get 4.2% for 3 months but it soon drops down to their default savings rate, which is 1.3%. Canadian Imperial Bank of Commerce has a regular interest of 1.40% and a smart interest of 0.75%. a 1.60% rate There are some higher rates, like the Scotiabank Momentum PLUS savings account, which is 4.50%, but this is limited to 5 months and has $5 transaction fees. For the Canadian neobanks, Neofinancial has a 2.25% interest rate and 1.5% at Wealthsimple. There are a couple of other grey-area neobanks (because, whilst they act as a neobank would, they are owned by a financial institution, thus making them not a challenger bank). These include EQ Bank, which offers 2.50% interest, and 1% at Tangerine. Are Neobanks really better? The above can appear quite confusing and conflicting, which is partly because banks around the world operate differently under different laws and within different markets - plus, the base rate is different too across the board. Some neobanks appear to have better savings rates than high street banks, but there are many cases of the opposite being true too. However, there are some other factors to consider here in regards to the prediction of neobanks gaining market share. Whilst the interest rates may not be always higher, they tend to be more transparent and straightforward. Looking at the UK’s Co-operative Bank and HSBC websites, there are around 40 accounts with different interest rate and fee structures, whilst most neobanks pursue a very clear and upfront deal. Right away, this makes signing up for neobanks easier. But, it’s not just the clarity, the process is also faster because it’s digitalised. Signing up to high street banks often requires a trip to a physical outlet along with presenting physical copies of your identity and address. Neobanks, on the other hand, usually require a selfie video plus a PDF copy of your identity and address, then await a day (though this can depend) and you’re approved. Finally, high-interest bank accounts aren’t always what they appear to be. Almost all of the accounts that stand out as being a very high savings rate come with many disclosures. For some, it’s that you only get this 4%+ rate for a few months before it drops down (in which you need to search through the small print to find). Secondly, these accounts often want you to lock in your deposits, which can come with withdrawal penalties, or they may have transaction fees and limits, as well as other fees. For example, the commonly applauded Scotiabank savings account has an unnecessary $5 transaction fee. Concluding thoughts Neobanks are better in many ways. Generally, it’s their low costs, low fees, and good exchange rates that are more impressive than their savings rates, but when aggregated together, many neobanks do work better as a savings rate (particularly if it’s one that has lots of activity). When depositing a large amount of money for a short space of time, some cash-rich high street banks may offer an advantage here, if you don’t mind the signing up process and reading the small print. So, whilst it may seem counterintuitive to claim that rising interest rates will cause people to flock to neobanks, it may be the case simply because more people are looking for alternatives right now due to the changing market. Currently, business accounts dominate the use of neobanks in the UK, but this trend is set to . shift slightly back towards savings accounts The US market size of neobanks is set to explode to over $45 billion, with payments and money transfers being the key driver. Still, if customers can achieve great exchange rates with fast transfer on a slick app and a competitive savings rate - even if it’s not the best on the market - then this creates a compelling reason to endure their very fast signing-up process.
