When I last wrote for Mortgage Finance Gazette on the topic of savings, I was struck by the number of renters who had no savings. A massive 66% of private renters according to Dan Wilson Craw, director of Generation Rent, at the BSA Annual Conference in 2019.

A year later, as we are in the midst of the coronavirus, people are understandably uncertain about their futures and their finances. But all of this convinces me even more of the long-term importance of saving and of strengthening personal financial resiliency.

What this current crisis has also done is make a review of the current savings market incredibly difficult – at the moment the population of the UK is hunkered down, staying safe and waiting it out.

But life will return to normal and at that point individuals and institutions will take stock and move back into commercial action, albeit in a 0.1% bank base rate environment. A historic low for interest rates.

What we may well continue to see for a while is a flight to cash given the massive volatility of equity markets. It is impossible to identify the point at which more sophisticated investors will call the bottom of the market and start to reinvest.

Economically we are likely to feel the effects of the coronavirus for some time and the savings capability of some people will, for a while at least, be subservient to finding employment and putting their businesses back together.

But cash savings will remain part of the DNA of the building society and credit union sectors and our role in helping people save and build their own financial resiliency will be even more important.

When the savings market does return to ‘normal’, a reprise of where we were before the breathtakingly rapid move from moderate risk to full blown lockdown may be a decent benchmark as we move forwards.

The savings market in early 2020

Back, before the coronavirus, there were positive signs in the savings market that people had more opportunities to save and were starting to do so.

Firstly, from the Office of National Statistics which tracks quarterly how much of a household’s income isn’t spent. It calculates the amount that is available to save as a percentage of households’ total disposable income. This number increased from 3.9% in 2017 to 6.6% in 2019 demonstrating that there are opportunities for people to save more.

There were also positive trends in the cash savings market served by building societies, where the sector has an 18% market share. Households’ savings deposits grew by £64 billion in 2019, an increase of £17 billion, on 2018, and the largest annual increase for three years.

This was driven by earnings growing faster than price inflation, allowing households to build up a savings buffer. Some households might also have increased their cash savings as a precaution against Brexit related economic uncertainty.

But in recent months wage growth began to lose momentum and CPI inflation picked up slightly. So households might have started to struggle to save as much as they did before. This clearly was before coronavirus and the impact of that, which we have yet to see.

Another positive sign came from the annual cycle of savings. Household savings usually fall in January each year as people pay off their Christmas bills. In January 2020 household savings fell by £6.4 billion – £3.6 billion less than January 2019. This was the lowest drop since January 2016, illustrated by the chart below.

Whether this is because savers are saving more or non-savers are starting to save is an interesting question. People are likely to continue to want to put money aside in the current uncertain environment, if they are able to, and while they cut back on spending during the coronavirus lockdown.

Over the past three years BSA analysis has shown that building societies have paid £2.5 billion more in interest than the larger banks. On top of this, the independent ‘Savings Champion’ has found that over the past six years building societies have consistently paid more in interest than some others. The second chart illustrates this.

The Single Easy Access Rate

The Financial Conduct Authority (FCA) is currently consulting on its proposals to improve savings rates for consumers.

The Single Easy Access Rate (SEAR) will, when introduced, require firms to offer one rate for easy access cash savings accounts and another for their easy access cash savings ISAs. Both of these would take effect after the initial 12-month period.

When the FCA’s original research was carried out, institutions providing personal current accounts tended to offer lower interest rates and larger banks had significant differences in interest rates for open and closed books. Now this gap has narrowed, these changes are no longer needed and if they are to be implemented, they need a lead in time of at least 12 months.

But since the consultation on SEAR began the Bank has cut its rate in response to coronavirus – firstly from 0.75% to 0.25% and then down to 0.10%. After years in a very low rate environment, this situation looks likely to continue for a while yet.

While we have yet to see the full impact on the savings market, it’s clear that rates are unlikely to be the biggest incentive to get people saving in the short term. In fact, Toynbee Hall ‘Beyond Age and Income: Encouraging saving behaviours’ report found that attitude to saving was more important than interest as a factor in encouraging people to save.

Personal financial resiliency

Back in 2017 the FCA carried out its Financial Lives survey. It found that even then people simply weren’t saving enough. The research found that 18% of adults didn’t have a savings account, 13% had no cash savings and 32% had less than £1,999 in savings.

In their most recent report published in April 2020 debt charity StepChange reported that in 2019 it was contacted by over 635,000 people in financial difficulty – most because of a life event or income shock. Even before this they had reported that households with £1,000 in cash savings were 44% less likely to get into debt.

A lack of financial resiliency also impacts on mental health, as people worry about money. This in turn impacts productivity as money worries don’t just impact people when they are at home, but when they are at work as well

Based on the FCA’s Financial Lives research the Yorkshire Building Society calculated that 11 million people weren’t saving, and of those 7.5 million were in work and so might have the opportunity to save.

In response to this the BSA convened a taskforce of building societies and credit unions to see what could be done. We’ve now committed to help people save through payroll savings schemes and set a target of a million workplace savers by 2025, working in partnership. Toolkits are available for BSA members to work with local employers to set up schemes to reach this target and we will be tracking progress.

There are already great examples across the BSA membership. The Principality gives its staff a £100 voucher when they complete their probationary period to open an account in branch. They have the same experience as a customer opening an account, become a member of the society and can regularly save through payroll deductions.

Capital Credit Union works with 75 employers to offer savings through payroll. These employers recognise the benefits of supporting their employees to save and the positive impact this has on both staff and the organisation – we hope that this will continue.

Gamification and digital innovation

We are also exploring digital innovation in savings, producing tools to make it easier to save and help motivate savers to hit their individual goals.

Challenger banks like Monzo and Starling allow customers to round up payments and put the difference aside in pots. There is also a range of third party fintech providing similar services such as Chip or Plum.

In addition to utilising mobile phone apps, the key concept they all exploit to a lesser or greater degree is the idea of gamification. This takes the mechanics of computer or board games – challenge, achievement and reward – but applies it in a non-computer environment.

If anyone has a fitness watch like a Fitbit or a fitness app like Strava, these are great examples of using the principles used in gaming of challenges, achievement and rewards to help people better engage with staying active and healthy and measuring their performance.

It has also been used to great effect in China to incentivise a low-carbon lifestyle and a massive tree-planting programme. In August 2016, the Chinese owned AliPay launched Ant Forest, a personal carbon account which rewards users with green energy points for low-carbon activities like booking appointments online, taking public transport or paying bills online. Once users have enough green energy points, they can plant a virtual tree in Ant Forest. But for every virtual tree planted, a real tree is planted in China. Celebrating its third anniversary in August 2019, Ant Forest revealed that some 500 million users had generated 122 million trees.

Financial institutions and fintech around the world are likewise deploying these principles of gamification to help people better engage with their finances. Just as the above have made fitness and health or low-carbon activities more engaging, these types of solutions are looking to do the same for savings.

For example, Principality Building Society recently announced a partnership with a fintech company called Life Moments to launch a first-time buyer app to help borrowers saving for their first home. The aim of Principality is to help its members focus on key goals around saving and help them to stay on track.

Looking ahead

Finishing on a positive note, savings accounts will continue to play an important role in household’s financial resources. With the Government supporting the incomes of many, but not all, and households cutting back on spending, we may just see cash savings go north rather than south.

In the coming months, people may continue to spend less, and move their money out of riskier assets into cash, increasing their precautionary savings. There have been reports that people are withdrawing some cash, or putting it into easy access or current accounts – a reaction to lockdown. This underlines the point that people value cash savings and will continue to do so going forward.

As well as being chair of the Building Societies Association, Mike Regnier is also CEO of Yorkshire Building Society