Retail savings: an attractive source of funding

While issues such as the impact of Brexit, regulation, competition and transforming business models through digitalisation are an immediate priority for many lenders not currently in the savings market, savings should be a strong future strategic consideration.

The UK retail savings market amounts to some £1.6 trillion of funds and firms are tapping into this for a number of different reasons.

First, it diversifies their funding base. One of the key lessons of the financial crisis of 2007 for lenders was not to be overly reliant on wholesale markets. Northern Rock was a prime example, getting into difficulty when money markets began to seize up in the face of the global financial crisis.

Drawings from the Term Funding Scheme – where qualifying lenders have been able to access funding via the Bank of England on attractive terms – closed at the end of February. Lenders who have been able to take advantage of the scheme (and its predecessor the Funding for Lending scheme) will have to plug that gap from other sources and savings is a prime candidate.

Retail savings – through large numbers of personal savers – offer a more stable source of funding. This is recognised through the Net Stable Funding Ratio, introduced by Basel III and which all banks are now obliged to observe. This is a measure of a firm’s funding where more favourable treatment is given to retail savings as a high-quality source.

Second, with rates still at historically low levels, retail savings can offer a low cost of funding compared to other forms. According to Moneyfacts, the average rate on no notice accounts is currently 0.49% on instant access and 1.27% on one-year bonds. With increased competition from many of the new entrants, there is currently upward pressure on those rates, but they are still historically at very low levels.

Securitisations, whether of residential mortgages or other forms of loan assets, are not dissimilar in terms of headline rate. Some lenders may also enjoy favourable rates in funding received from overseas parents. However, others have other more expensive forms and retail savings can offer them an improved margin.

Currency risk has become more of a concern with increased volatility in sterling in light of Brexit. This has been another consideration for those firms funded in a different currency from overseas parents and provides added impetus to fund lending in sterling through sterling deposits.

Finally, for those challenger banks with private equity owners, having a banking licence and a retail deposit base is of real attraction in terms of adding future shareholder value.

What is involved in entering?

Being entrusted with the public’s savings comes with responsibility and firms need to be fully authorised by the Prudential Regulation Authority (PRA) and regulated by them and the Financial Conduct Authority (FCA).

The government and regulators have been keen to reduce the barriers to entry for prospective banks and encourage greater competition. However, although the current process to submit an application for a banking licence is more flexible and involves less financial risk than in the past, there is still clearly a high bar for applicants to pass before being authorised and allowed to accept deposits.

Assuming firms have the required regulatory approvals, they will need to decide on their operating model for offering savings. This may mean outsourcing full customer operations to a savings management provider such as Newcastle Strategic Solutions. It may mean buying or building systems, acquiring the full range of know-how and creating an entire operation.

In deciding their preferred operating model, firms should consider their desired speed to market, the risks of entry, cost and the level of distraction it will cause to their other business activities. From our own experience, we know that firms see it in different ways depending on existing system capabilities and in-house knowledge.

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