Digital banking: The Saving Saviour

We’re not saving as much as we used to, it seems.

Politicians and commentators alike have long castigated the general public for not putting enough money aside for a rainy day. That may mean a simple savings account in which we stash some income just in case we need it for an emergency, or it could mean something much more fundamental like the pension you’ll need to live off once your working career finishes.

The stats for the ‘un-saved’ are pretty alarming. In the US, one report reckons over a fifth of people (21%) are not saving any of their income. While in the UK it is estimated that 15% of people have no savings at all, while a third of us have savings worth less than £1,500.

This can be depressing reading: no only because we all know we should be saving more on principle but also because if (like me) you’ve been struggling to save in the first place, then the last thing you want is to be lectured on how and why you should be saving more.

There are two stories to tell here. One about why it’s harder than ever to save money and another about how there are new solutions at hand. Once upon a time interest rates were higher than the paltry 0.75% the Bank of England has reissued recently. They used to be nearer 5%. This meant if you put £100 in a savings account, you’d have £105 by the end of the year.

Currently, low-interest rates can be a good thing if you have debt, but if you are ‘saving’ then you won’t be feeling flush because current inflation is around 1.9%, well over double the interest rate. So, while you might have 75p more if you save £100 for a year, the things you will want to spend your savings on eventually will have risen in price by far more than 75p. In real terms, you are losing money.

This has been compounded significantly by higher inflation in certain areas. Train tickets, for example, have been estimated by some to have risen 40% in the last ten years. This year, again, they will go up by around 3% using the RPI inflation index (the one you use if you’re trying to justify a big price hike). This is almost quadruple interest rates and 1% over the CPI inflation index (the one you use if you’re trying to set interest rates).

House prices have also done something similar. In the last ten years, they have more than doubled in certain areas. The government doesn’t put property into the consumer inflation ‘basket’, but if it did, then, by some estimates, we’d be looking at a 44% house price increase, drawing the cost of living up by 4-8% a year.

The bottom line is that all this is reflected in that cost of living: renting, traveling, and general life has never been more expensive. Further, wages have stagnated since the last financial crisis. Although they are now rising, in real terms, people are much worse off. This should all clarify the case for saving, but the opposite is true: save in a normal interest rate account, and you will actually lose money. The last thing a millennial needs from a high street bank is a lecture on this (especially if that bank received a multi-billion pound taxpayer-funded bailout because it couldn’t keep itself solvent).

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So, what’s the solution? Fortunately, the advent of digital banking has reinvigorated the prospect of saving. A bank without the overheads and margin costs of a big legacy system and infrastructure will be able to offer more competitive interest rates when it comes to saving. They will also be able to offer a much more manageable service - communicating directly with clients in-app and making suggestions on where and how they might like to move their money, given the current saving environment. That might mean simply putting £1 a day into a saving pot, or it might mean something more complex, like using a live data saving calculator to work out the deposit amount you need for a house.

The real kicker will be in the diversity of saving: a digitised service will be able to offer savers access to assets that really do have a return that’s higher than inflation - such as stock markets, bonds, and currencies. This diversification of your saving portfolio is likely to encourage a new generation of savers and should make them the best-informed savers ever as information is now so easily disseminated.

This all creates a dialogue, aligning the interests of clients with their bank. Not so long ago that didn’t exist - banks sold clients toxic debt that ended up bringing down the whole system. Now there really is hope for saving and its return as a financial saviour.

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