Show them the money! Investors are victims of the banks' Great Savings Robbery
Recent reports in the media and on this site that half a million savers at Royal Bank of Scotland and NatWest will see their interest rates cut by the end of the year as part of what banks are describing as a "simplification" require further examination. Back in June, I noted that banks were offering savers and investors a miserable deal. Revisiting what I then termed the Great Savings Robbery, I now see that the situation has got even worse.
By leaving their savings in low-yielding accounts with banks and building societies, British savers will lose over £72 billion in potential investment income over the next year.
According to figures from the Building Society Association (BSA), total UK cash deposits at the end of July 2014 were £1.2 trillion. The average quoted deposit interest rate, according to the BSA figures, was 0.62 per cent on instant-access savings accounts (assuming savers keep their money in long enough to qualify for a loyalty bonus of 0.2 per cent). The average fixed-rate bond gave savers 1.23 per cent over one year and 1.52 per cent per annum for those prepared to tie their money up for two years.
The difference between bank deposits and lending to Money&Co. companies is enormous
Compare that to what's available from loan-based crowdfunders, who connect individuals who are looking for a better rate of interest on their cash with companies that need to borrow money to expand. Money&Co. is one of the newest loan-based crowdfunders. We have completed eight loans since May of this year with an average gross yield of 8.2 per cent. We take a fee of 1 per cent per annum and so a lender who had invested in all of our loans since launch would be receiving a net annual income of 7.2 per cent. The difference between leaving your money on deposit at a bank and lending it to companies on the Money&Co. site is clearly enormous. If all the money left on deposit with a bank or building society was invested in our loans, savers would get an additional £72 billion in interest in one year alone.
Some would argue that there should be a big premium for this sort of lending. After all, if you leave your money on deposit with a bank and something goes wrong, the government will be there to bail you out. Not so with a crowdfunding platform. And, even if the crowdfunding platform itself is financially secure, there is always a risk that individual loans will go wrong. My answer to that is that people lending money on our site must diversify their risk by investing in a number of loans with different risk ratings.
This will reduce the overall risk. It is indisputable that there is greater systemic risk to investors who lend directly via a platform rather than leaving their money with the bank, but the difference in the interest that can be earned is so enormous that I think it is a risk worth taking.
If there are £1.2 trillion of deposits held in the UK, that means that for each of the 60 million inhabitants, there is £20,000 on deposit. If each of us had £20,000 of cash, we would be roughly £1,194 per annum better off if we invested that money in a portfolio of Money&Co. loans rather than leaving it on deposit.
You can learn more about how to lend by watching a short video. We currently have an A-rated loan (a very high score on our rigourous credit-analysis test) with an indicative gross yield of seven per cent. The risks of lending are spelled out in greater detail here.
** We have been nominated for the People's Choice award in the forthcoming Alternative Finance awards. I don't have to say whom I think you should vote for! You can support our new business and the crowdfunding industry in general by voting here.