Whichever way the base rate goes, fintech demand for cash will continue to ride high
Cash will still be king in 2024, writes Flagstone's CEO Simon Merchant
There is a spurious idea circulating that cash deposits have experienced a wild rebound all on account of the fast rising interest rates of the last two years.
If this is true, it should follow that if the base rate dips in 2024 (current forecasts predict a 100bps dip to 4.25 per cent by year end), so too will demand on banks for savings options.
Certainly, there is some truth in the first assumption. There is much interconnectedness between the attractiveness of cash and rising rates.
The high inflation and fast-rising interest rates of the last 24 months have supplied a launch pad to prove once again the appetite for cash savings and provided an impetus for hundreds of thousands more people to put their hard-earned money into more savings accounts.
These market conditions have prompted at the same time more banks to provide more compelling rates. Competition for rates is now at its highest for more than a decade.
But, the second assumption is plainly wrong. Whichever way the Bank of England takes the base rate next year, demand for cash will continue to ride high.
There are two key reasons for this - one based on history, the other on the most modern innovations.
First, while the recent cash influx has drawn positive attention to the asset class, this word ‘rebound’ is an unfortunate misnomer. Cash, after all, has always been king: UK savers alone hold £1.5trn in savings accounts.
This didn’t all flood in in the last two years either - apart from a considerable bounce during the first months of Covid pandemic when many household outgoings were severely curtailed, total household savings have doubled in volume in the 15 years since the financial crisis at a very steady rate.
Second, even if the base rate was to dip below predictions next year (unlikely), or fall entirely to nil (which it won’t), the wholesale fintech innovation that has been as delayed as it was welcome to the cash deposits space has taken hold of this sector in a way that will not falter.
Savings was one of the 'higher hanging fruits' of fintech that eluded innovation until the last few years.
While the ways that people access reward-laden current accounts or democratised routes into both private and public market investing have been transformed beyond recognition in the last decade, cash deposits have been a slower, more complex market to disrupt.
But, demands of the macro-market have finally given way to fintech change in this space.
That change has brought with it choice, flexibility, visibility and speed - none of which any of the banks thought to provide to savers previously. It's not just banks that are offering savings now either.
Major household brands with financial services products are getting in on the game for the first time, or taking their savings options a lot more seriously.
These brands know they must continually improve the standard savings option they used to provide.
Competition and choice are key and as a consequence these brands are increasingly less inclined just to partner with one bank and offer that single provider's savings accounts.
Fintech innovation has allowed them to approach what they offer to their own savings customers differently and cast the net far more widely.
All this is encouraging a lot more competition between banks to forge greater inclusion and create better outcomes for customers. And so far, some metrics would suggest it is the (fintech) challengers and neo-banks that are winning.
While more traditional banks benefit from inertia among long-term customers who don’t think about their savings and leave them where they are, younger, nimbler banks are fast winning market share with competitive rates and easy-to-use interfaces.
All this serves to demonstrate that the great cash ‘rebound’ has been anything but. Instead in the last few years fintechs have been simply playing catch-up, opening up the asset class and levelling the playing field as they go.
This all bodes well for 2024 - which frankly isn't a sentiment we're hearing a lot of at the moment. As changes to the base rate slow and inflation recedes to its target 2 per cent, we can expect to see more competition than ever in the savings space.
Momentum that wasn’t there the last time rates fell will help maintain fintech pressure on the incumbent players.
And this disruption can’t come soon enough. As a nation we don't save enough. And as a nation with a fast-growing over-60s demographic, this failure to save is putting pressure on future financial wellbeing and retirement plans of millions of people, as well as a state that must support them.
Innovation must now prompt fresh inspiration. In 2024, fintech’s savings innovators must challenge the status quo further, and find more new ways to encourage more savers to put more of their hard-earned cash into savings accounts.
As challengers and neobanks lead the way, incumbent banks will have no choice but to follow suit if they want to maintain their positions in the sector. It’s win-win for all when cash remains king.