Alternatives to traditional big banks
Chris Hogan, 5th January 2016, Household
There are calls to increase competition to the high street banks and there are signs that people are beginning to try out alternatives. So what are the alternatives and what do they offer?
The Channel 4 programme "Bank of Dave", which followed Burnley businessman Dave Fishwick as he set up a bank, showed how difficult it is to set up a competitor. For a start, he discovered there was no definition of a 'bank' in the relevant legislation. No wonder only one new bank has been granted a licence in the last 100 years - Metro Bank in 2010.
But that mean that there aren't alternatives. Many organisations, like Burnley Savings and Loans (the real name of Dave Fishwick's new business) focus on a subset of the services that banks can offer and for most of us ordinary people, banking is about a secure place to put money where we can save and sometimes borrow.
Of course most building societies offer the services a high street bank can but we are looking at less mainstream alternatives, and many building societies are now owned by banks in any case. Two that have been around for a very long time, but still aren't that widely know, are credit unions and friendly societies.
Credit unions
These collect savings from groups of people and then share that money out in the form of loans. Those groups are usually geographically based, so only residents of a certain town or county can use a particular credit union. There can be other types of grouping - people sharing the same occupation, for example, or people in the same union, religious group or other association.
Credit unions are run by their members and promote thrift and good money management. Profits are distributed among the members in the form of dividends and interest rates on loans are usually very competitive. They are regulated by the Prudential Regulation Authority and the Financial Conduct Authority.
Friendly Societies are very similar but not all will offer banking services, many just offer insurance products and support members with financial aid when necessary.
New banks
The so-called "challenger banks" are attracting interest, brands such as Paragon, Aldermore and RCI are taking customers from the usual names. Between 2011 and 2014 analysis of over 15 million enquiries on MoneySuperMarket.com were about these new banks and with legislative changes on the way to make starting a new bank easier, many organisations both in the UK and abroad are waiting in the wings.
Aldermore was founded in 2009 and focusses on services to small and medium-sized businesses although it does offer personal savings accounts and mortgages. RCI is the banking arm of French manufacturer Renault and launched in the UK in 2015.
Paragon Bank was setup by the Paragon Group, a specialist lender to the buy-to-let mortgage market. All these three, and many of the other pseudo-banks emerging, rely on the internet and telephone to deliver products and services, meaning they don't have to handle the overheads of branch networks.
Retailed-owned banks
Supermarkets started setting banking services up about twenty years ago although they were initially acting as agents for existing banks - Sainsbury's with Lloyds and Tesco with The Royal Bank of Scotland, for example.
Most of them are now independent, taking advantage of the loosening of the regulatory strings around banking, although M&S have gone the other way and sold it's financial arm to HSBC. The Co-op supermarkets and Co-operative Bank are separate organisations but both owned by the Co-operative Group.
Retail-owned banks quite often come up in 'best buy' tables so might well be worth considering, particularly if there's a shop near you where you can access banking services.
Peer-to-peer lenders
These internet-based services allow people with money to lend it to people who want it, using a website to connect the two. Sites like Zopa, Ratesetter and Funding Circle offer rates significantly higher than traditional lenders (and lend at lower rates too) with Funding Circle lending to businesses - with higher returns but higher bad debt risks.
There is a higher risk with these services as you are effectively gambling on getting your money back, but since April 2014 Peer-to-peer lending services have come under the auspices of the Financial Conduct Authority so they now have to outline the risks clearly.
The most important thing to understand that although you might not get as good a return as you expect, you can also lose your capital. So perhaps it is a place to put some of your savings, but not all, as part of a portfolio of savings with a range of risks and rewards. Detailed investigation into how each site works and what the risks are is vital before making any deposit.
Do your own research
That brings us neatly to a very important point - you must research any of these banking alternatives before deciding where to place your hard-earned cash. There is only enough space here for us to skim over the different options and risks - independent research is vital.
