High street banks are raking in profits from older customers who don’t switch and leave large sums in current accounts that pay low interest.
These customers are earning the banks the most profits compared to those paying high overdraft charges, research from the financial services regulator the Financial Conduct Authority (FCA) shows.
Banks are able to profit from savings held in accounts as they are able to use the money to fund loans and mortgages which they can then charge higher rates on – known as the funding benefit.
The regulator found that, on average, customers aged 61 are the most lucrative for the banks, holding on average £33,000 in their current account and £17,000 in their savings account.
This was followed by customers aged 39 who have a balance of £685 and around £720 in savings who contribute mainly through overdrafts.
The research found that the average customer with a free account will generate the bank £72 a year, while a current account holder will make the bank £86 a year. Reward accounts generate the most money for banks each at £96 a year.
While current accounts tend to be free, they generate little in the way of interest for the holder.
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The study found a number of banks have “adopted pricing models that appear not to advantage loyal customers”.
It revealed that as well as savings accounts paying very low interest rates, particularly to long-standing customers, some banks were charging high standard variable rates (SVRs) on mortgages outside fixed-term deals and higher interest rates on credit cards outside initial offer periods.
According to a 2016 report by the Competition and Markets Authority, around 90% of customers would gain £92 a year by switching banks.
It also found that switching amongst bank customers is low at 3% a year on average.
An FCA spokesperson says: “We found many customers have been with their personal current account provider for many years despite better deals being available. Many customers, including those with so-called 'free-if-in-credit' accounts, receive little or no interest on balances and pay high overdraft charges.
“We expect the changes introduced under open banking to encourage more competition and innovation in the coming years.
“They should also make it easier for customers to compare their bank account to ensure they are getting the best value and to switch if they are not.”
Get a better deal for your money
Savers struggling with low interest rates from their bank can still find a good deal if they shop around.
With interest rates so low at the moment switching to a new account could give you a much-needed cash boost.
Switching banks has never been easier, with the process taking no more than seven days.
Lots of challenger banks are offering better rates than on the high street.
Goldman Sachs unveiled its Marcus 1.5% easy-access account last year to much fanfare. Since its launch we have seen rate rises across the board with Virgin and the West Bromwich Building Society both matching it.
However, they do come with a catch. Both the Virgin and West Bromwich accounts limit you to two withdrawals a year, while the Marcus rate includes a 0.15 percentage point bonus for the first year you hold the account.
Fixed-rate savings accounts
Also, don’t be afraid of trying out a bank if you don’t know the name. Some of the top paying accounts out there are from providers you may never have heard of.
If you have got a lump sum and don’t mind locking it away you might want to try a fixed rate savings account.
As interest is fixed your return is guaranteed, however, you have to bear in mind that withdrawals and further deposits are rarely allowed.
The current top one-year bond is from sharia-compliant Gatehouse Bank at 2.05%. Atom Bank and Tandem Bank are both offering three-year bonds at 3%, while if you are after something a bit longer Vanquis Bank has a five-year bond at 2.70%.
Regular savings accounts
Some of the best rates out there at the moment are with regular savings accounts which pay up to 5% interest a year. However, some only offer the headline rate for a year and you have to be an existing customer. You will also have to make deposits each month, usually from between £10 to £250.
The First Direct Regular Saver offers an interest rate of 5% for deposits between £25 and £300 a month, allowing you to save a maximum of £3,600 a year. The rate is fixed for 12 months and is only available to current account customers.
There are other accounts that pay 5% interest, but they are more limited in the amount you can deposit.
There are still some current accounts out there paying good interest rates.
The best high interest current account out there is the Nationwide FlexDirect, which pays 5% interest on balances up to £2,500 for the first year, but this then drops to 1%. There are no monthly fees, but you have to pay in a minimum of £1,000 a month.
Another option is the TSB Classic Plus, which offers 5% interest on balances up to £1,500, provided you pay in £500 a month. The Tesco Bank Current Account offers an attractive interest rate of 3% on balances up to £3,000, but you must pay in at least £750 a month.