In a market dominated by rigid and often cumbersome financial institutions, challenger banks are a fairly new phenomenon.

Whilst they may sound like something more at home in a Star Wars film than your local high street, they have arrived with a bang and have quickly fought their way up the best buy tables.

On paper, they make a compelling argument by offering:

  • Savings accounts with high interest rates
  • User-friendly apps and online platforms
  • Products for areas underserved by traditional banks

However, with this influx of new contenders comes the potential for the public to assume that every bank is made equal. This, of course, is sadly not the case, making it essential for consumers to understand exactly how secure a challenger bank is, and how much of their money is protected should the worst happen.

So, exactly how do interest rates for challenger banks compare? And more importantly, how secure are your savings?

The challengers

For those looking to make the most of their savings, the usual advice for finding the best interest rate is to shop around. A combination of scouring the high street and checking online can give you a good idea of who is offering the best rate. But with rates often similarly low, it can be a challenge to choose the right provider.

In the past, the list of possible candidates was fairly small, occupied by the same well-established names that had seemingly always been there. Recently, however, a scattering of new names has been popping up on the best buy tables, with abstract names like Zopa, Monzo and Atom.

According to the Oxford dictionary, a challenger bank is: “A relatively small retail bank set up with the intention of competing for business with large, long-established national banks.”

These new kids on the block offer a new way of banking which seems to have resonated with the public. Metro Bank, which was launched in 2010, saw its 52nd branch open in November 2017 (Source: Metro Bank). Many challenger banks, however, offer an online-only presence to cater for the digitally fluent younger (and increasingly older) generation.

How safe are challenger banks?

Most traditional high street banks are protected by the Financial Services Compensation Scheme (FSCS). This means that should a bank fail, the FSCS will cover the loss of up to £85,000 per person, per financial institution.

This protection is vital for those holding their savings in a bank or building society, as they would stand to lose everything if their chosen provider wasn’t covered.

According to the FSCS, many challenger banks are covered, such as:

  • Monzo
  • Starling
  • Tandem
  • Atom
  • Close Brothers
  • Metro Bank

(Source: FSCS)

However, it should not be assumed that all challenger banks are covered without checking them out first-hand. The FSCS offer an online tool (available here) that allows you to search for a specific provider and see their FSCS status.

How competitive are the rates?

Put simply, it depends.

The best buy tables shuffle from month to month, but more often than not a challenger bank will sit at the top, or be fairly close to the best rate. For example, at the time of writing, Atom Bank offers the best one-year and two-year fixed-rate bond, with a rate of 1.95% and 2.10% respectively.

Regular saver accounts are dominated by high street banks, with the top five accounts offering 5%

Don’t get deflated

Whilst it is important to get the best interest rate possible, it is worth bearing in mind the effects that inflation will have on your savings. Any account that offers a return that is below the rate of inflation as measured by the Consumer Price Index (CPI) will result in a real terms loss. You may have more than you originally had, but the spending power of that money will be decreased, making it effectively worth less.

At the time of writing, this was 2.7%, making it incredibly difficult to find a savings account that combats inflation.

We are here to help

For more information on the importance of finding a safe and secure place for your savings contact Sarah or Bev on 0115 9338433.