Opinion

Banks don’t give you a fair return on your money

Why are banks paying 1% when fintechs pay more than 3%? Asks Jack Maddock, Product Lead at Wise Business
By
Jack Maddock
Bank graphic

SMBs (small and medium-sized businesses) have a lot of challenges - from raising cash, to finding customers, to managing a workforce. While for some businesses, life is a story of exponential growth, for most it is a hard slog to stay afloat and grow sustainably, something made far harder by the endless turbulence of recent years. So, businesses need fairness where they can get it. They don’t deserve to be ripped off by banks.

Banks do not pass on fair returns to their customers - and this includes business customers. Even when Central Bank interest rates are high, as they currently are at 4%, banks refuse to offer anything more than the most meagre rates to customers. At a time of rampant inflation, that’s devastating - and for a business it’s particularly bad, the difference between a 1% return and a 3% return can be the difference between profit and loss, growth and stagnation.

Maybe you would accept a low return if you had full confidence that your money is safe, that it’s locked away in some big cartoonish vault, impenetrable to daring robbers or draining runs. But banks fail. They go kaput. And when they do, businesses are entitled to only FSCS compensation of up to £85,000, a largely insignificant amount for many businesses with payrolls, suppliers and running costs.

The system is unfair. Banks refuse to pay a fair return, while businesses are unable to have full confidence in the safety of their money. There are a few reasons why such a broken status quo stands. One is a lack of competition: if every bank acts like this, then why would any change? The other is banks’ own models. Banks are big lumbering things, bound by dated infrastructure and tech. All this is expensive to run, meaning banks need to make a lot of money where they can. One way to do this is to offer only marginal returns on deposits.

All of this is, thankfully, changing. Fintech providers are solving the two big problems that have held the status quo. Firstly, they are providing competition. When SVB collapsed, its business customers headed to the likes of Arc, Mercury and Brex, young fintech providers that offer strong returns and sleek services.

Secondly, fintechs are free from the vast, anachronistic infrastructures of banks, burdened by bad tech and physical branches. Rather, fintechs operate digitally, using newer tech, maximising data, and therefore able to work with lower margins. This means fintechs can offer products that give customers more for their money and better match their needs.

For businesses, fintechs can make a better home for their money.

At Wise, we offer businesses a new service that we’re proud of. Our Interest product allows businesses to hold their funds with us and earn an interest rate close to that set by the central bank, something especially important during inflation. Currently, UK holders get a 3.65% variable return. We want this money to be as safe as possible, so we hold it in a secure Public Debt Money Market Fund which closely tracks interest rates and only holds assets backed by the UK Government, meaning the entire amount is safe (barring a government default or negative interest rates), not just £85,000. We do this because we think the current system is wrong, and because businesses deserve something better.

We are just one provider. There are many fairly new entrants to the market that can offer businesses something better than a big old bank. What’s important is that the sector is disrupted with entrants that can offer better services that provide a better return. In doing so, businesses get new levels of choice. Banks, meanwhile, will be forced to improve their services - or risk losing valuable customers. Business banking is changing, that’s a good and timely thing. 

Written by
Jack Maddock