Challenger banks use new tactics to take on ‘big four’

THE big banks are being shaken up by a string of young and hungry challengers who claim to offer more competitive products than their older rivals.

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Thousands of unhappy customers at the so-called big four, Barclays, HSBC, Lloyds and RBS/NatWest, have already switched to the challenger banks in a bid to get a better deal.

There are plenty of new names to choose from including Tesco Bank, TSB, Virgin Money, M&S Bank, Metro Bank, Aldermore and Shawbrook.

But do these new banking entrants live up to the hype and is it really worth the effort of switching your current account, savings, credit cards, personal loans or mortgage?

Current accounts

For years the traditional high-street banks barely competed for current-account customers because so few people went to the trouble of switching banks.

Most banks offered the same basic services such as a cheque book, debit card and overdraft, and paid a meagre 0.1 per cent interest rate if your balance was in credit.

Two factors have changed that. The first is the launch of the current-account switch service, which makes it possible to swap banks and take all your direct debits and standing orders with you, in just seven working days.

Nearly 600,000 customers used the service to switch accounts in the six months after it was launched last September, according to figures from the Payments Council.

The second factor is the rise of the challenger banks, which are battling for new business by offering eye-catching interest rates and other tempting extras on their current accounts.

But watch out, there are stiff terms and conditions attached.

Tesco Bank, for example, offers 3 per cent interest on current-account balances up to £3,000, as well as Clubcard points and competitive personal loan and credit card rates, on condition that you pay in at least £750 every month.

The TSB Plus account pays 5 per cent interest on credit balances up to £2,000, but only if you pay in £500 every month.

Established banks are fighting back against these interlopers, however, with First Direct, Halifax and the Co-operative Bank offering a £100 to anyone switching to them

Harvey Jones

Metro Bank does not pay interest on its current account, but its branches have long opening hours, including from 8am to 6pm on Saturdays and 11am to 5pm on Sundays.

It also offers free debit card use in Europe and a competitive 15 per cent authorised overdraft rate.

M&S doesn’t pay any interest on its free current account, but it does give new customers a £100 gift card as an incentive to switch.

Established banks are fighting back against these interlopers, however, with First Direct, Halifax and the Co-operative Bank offering a £100 to anyone switching to them.

The Halifax Reward Current Account pays you £5 a month, provided you set up two different direct debits, stay in credit and pay in at least £750 every month.

The Lloyds Club account pays interest rates rising to 4 per cent on balances up to £5,000.

To qualify you must pay in £1,500 a month and set up at least two direct debits.

Nationwide’s current account pays 5 per cent on balances up to £2,500 with no monthly fee but only for the first 12 months.

After that, the rate falls to just 1 per cent. You also have to pay in £1,000 a month.

The hugely popular Santander 123 account pays 3 per cent on balances between £3,000 and £20,000.

It also pays cashback on your direct debits, worth 1 per cent on your council tax and water bills, 2 per cent on your gas and electricity bill and 3 per cent on your telephone, mobile phone, broadband and TV.

Santander 123 has a £2 monthly fee and you will need to maintain a balance of £1,000 to receive interest, pay in at least £500 a month and set up two direct debits.

With so many offers to choose from, you need to take some time to find the right one for you, says David Black, banking specialist at Consumer Intelligence.

“If you’re always in credit, look for an account that pays interest on your balance. Your shortlist could include accounts from Lloyds Bank, Nationwide, Santander, Tesco and TSB and Halifax,” Black says.

Make sure you meet all the terms and conditions, including paying in a set amount each month, setting up direct debits and staying in credit, Black says.

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Credit cards and personal loans

M&S Bank, Tesco and Sainsbury’s lead the charge into offering low-cost borrowing, with attractive rates aimed at their customers.

Tesco has a credit card with a 0 per cent introductory rate on purchases for the first 19 months, while Sainsbury’s offers 16 months and M&S offers 15 months.

But traditional lenders are fighting back hard, says Kevin Mountford, head of banking at MoneySuper-Market.

“Halifax recently launched the longest interest-free purchase credit card on record, lasting 20 months,” he says.

Traditional banks dominate credit cards, offering a 0 per cent introductory rate on balance transfers.

Barclaycard charges 0 per cent for the first 33 months, while Halifax, MBNA, Bank of Scotland and Lloyds charge 0 per cent for the first 32 months, an offer only matched by one recent banking entrant, Tesco.

Barclaycard has dominated balance transfer cards for several years, Mountford says.

“But you should check all the options, both from established and challenger banks. In this marketplace it really does pay to shop around,” he adds.

New entrants are competing fiercely when it comes to personal loans. Hitachi Personal Finance, Sainsbury’s, Tesco and M&S all charge from 4.1 per cent for a three-year personal loan at £7,500.

But they are beaten by HSBC, which currently charges just 3.9 per cent a year, but this rate is only available to existing customers.

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Savings rates

Big high-street banks and building societies have snubbed savers, giving the challenger banks an open goal, says Anna Bowes, director of online savings rate tracking service Savings Champion.

“Established names such as Halifax and Santander no longer appear in the best buy tables.

“They have effectively abandoned savers, giving challenger banks a great opportunity to compete for cash and raise their profile at the same time.” says Bowes.

New entrants grasped the chance, she says. “Challengers have become the savers’ saviour, competing each week for the top spot in the ‘best buy’ tables, which in turn has driven rates up.

“Shawbrook, Aldermore and Vanquis have been aggressively pricing their new savings products, especially with fixed-rate bonds,” she adds.

Investec Bank currently offers a best buy two-year savings bond paying 2.38 per cent a year, Shawbrook offers a top three-year bond paying 2.75 per cent and Vanquis has the leading four-year bond at 2.96 per cent, Bowes says.

Your savings are safe with the new banks, which come under the Government-backed Financial Services Compensation Scheme, which covers the first £85,000 of your savings if your bank goes out of business.The mortgage “best buy” tables are still dominated by traditional lenders such as Halifax, HSBC and Nationwide, and that seems unlikely to change.

Virgin Money has some competitive deals, which currently include a three-year fixed-rate mortgage at 2.69 per cent up to 70 per cent loan-to-value (LTV), with a £995 fee.

The Post Office has also offered competitive rates.

But the challenger banks are primarily competing on service rather than interest rates, says Mark Harris, chief executive of mortgage broker SPF Private Clients.

“Aldermore, One Savings Bank and Shawbrook differentiate themselves by looking at riskier or more complex mortgage business, rather than making a simple tick box decision,” Harris says.

This can make them attractive to would-be borrowers who have been rejected because they fall outside the narrow criteria adopted by the major lenders, Harris adds.

“Aldermore, for example, offers mortgages up to 100 per cent LTV for first-time buyers and second-steppers via a Family Guarantee.

“Unlike many of its high-street peers, Metro is willing to look at loans over £1STnSmillion, up to a maximum £5 million.”

Shawbrook assesses mortgage applications using old-fashioned underwriting, in contrast to the “computer says no” mentality adopted by many lenders.

Adrian Anderson, director of broker Anderson Harris, says: “The beauty of the challenger banks is their ability to underwrite and do deals that other banks can’t. But you should also look at traditional lenders to find the right deal.”

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