Starling Bank has launched its first ever savings account, offering a rate of 3.25% AER. But with more digital banks breaking into the savings market, could you get a better deal elsewhere?
The One-Year Fixed Saver is the latest savings product to be rolled out by a 'challenger bank' - a term used to describe the wave of smaller, digital start-ups taking on the big high street providers.
Starling claims the biggest benefit of opening its app-only account is the ease with which you can set it up and manage your funds. It's not the only digital savings account on the block, however. So how does it compare to what other challenger banks offer?
Here, Which? takes a closer look at the competition and why people are choosing digital providers to grow their savings.
What is Starling Bank offering savers?
Starling Bank, which launched the UK's first app-only current account in March 2017, rolled out its new One-Year Fixed Saver last week. It offers 3.25% AER on balances of £2,000 or more.
To open the account you'll need to be an existing current account customer and, like all fixed-term savings products, you won't be able to access your funds until the fixed period ends.
However, Starling's app-only service means you can set up the account in a matter of minutes and can keep track of how much interest you are earning at any time during the 12-month period. You can also set up more than one savings accounts at the same time.
- Find out more: how to find the best savings account
Can it beat savings rates from other challenger banks?
Starling isn't the only challenger bank competing to attract savers. Indeed, increased competition among these digital-only providers has helped push average savings rates up over the last year.
The average rate on a one-year fixed bond rose to 3.51% in December and stands at its highest level since 2008. According to analysis from Rachel Springall, finance expert at Moneyfacts, that is partly down to the launch of more savings accounts from challenger banks.
With more app-only providers vying for new customers, it's worth shopping around for the best deal. The table below shows the top five one-year fixed term accounts from challenger banks, ordered by rate.
| Account | AER | Terms |
|---|---|---|
| Atom Bank One-Year Fixed Saver | 4.25% | £50 minimum deposit |
| Zopa One-Year Fixed-Term Savings | 4.25% | £1,000 minimum deposit |
| Tandem Bank One-Year Fixed Saver | 4% | £1 minimum deposit |
| Monzo Fixed Savings Pot by Charter Savings Bank | 3.9% | £500 minimum deposit |
| Starling Bank One-Year Fixed Saver | 3.25% | £2,000 minimum deposit |
Source: Moneyfacts. Correct as of 20 December 2022, but rates are subject to change.
If you are looking to open a savings account with a challenger bank, it's clear that Starling Bank doesn't currently offer the best rate for a one-year fixed-term account. It also requires the highest minimum opening deposit.
Zopa, a Which? Recommended Provider, offers the joint-best rate on the market right now of 4.25% AER, but you need £1,000 to open it.
For savers that don't have a large lump sum to invest, the best options are Atom Bank and Tandem Bank.
- Find out more: challenger and mobile banks explained
Are there any better rates elsewhere?
All the top five one-year fixed accounts available from challenger banks offer above average interest rates. But how do they compare to the market overall?
This table shows the top rates for all one-year fixed-term accounts.
| Account | AER | Terms |
|---|---|---|
| State Bank of India Fixed Term Deposit | 4.31% | £10,000 minimum deposit |
| Sensible Savings Fixed Rate Bond | 4.28% | £5,000 |
| Atom Bank 1 Year Fixed Saver | 4.25% | £50 minimum deposit |
| cahoot Fixed Rate Bond | 4.25% | £500 minimum deposit |
| Gatehouse Bank 1 Year Fixed Term Woodland Saver | 4.25% (EPR*) | £1,000 minimum deposit |
Source: Moneyfacts. Correct as of 20 December 2022, but rates are subject to change. *The account from Gatehouse Bank is Sharia-compliant, and so pay an expected profit rate (EPR) as opposed to an annual equivalent rate (AER).
As you can see, challenger Atom Bank not only offers a comparable top rate to other one-year fixed term account providers, it requires a smaller deposit to get started.
- Find out more: the best savings rate this week
Why are savers choosing challenger banks?
One of the biggest selling points of challenger banks is the ease with which customers can open and manage an account. In most cases it is as simple as downloading an app on your phone and going through a few quick and straightforward security procedures. They also offer a modern design, personalisation and snappy customer service to tempt people in.
Of course, with less overheads to worry about than high street providers with branch access, they are able to offer competitive rates - and it's not just for one-year fixed-term accounts.
Chase, one of the newest app-only challenger banks in the UK, recently increased the interest rate for its easy access account from 2.1% to 2.7%. The change will take effect from 4 January 2023 and is higher than the average easy access rate of 1.43%.
How safe is your money?
There are some downsides to saving with a challenger bank, however. Start-ups are at greater risk of failing, so you should make sure you know how your money is protected.
While challenger banks have to abide by the same rules and regulations as other banks, not all of them are covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of a saver's pot if a bank goes bust.
While the likes of Starling and Monzo have banking licences in the UK, some companies such as Revolut operate under electronic or e-money licences instead. This means you don't get direct protection under the Financial Services Compensation Scheme although your money must be ring-fenced in a segregated account.
It's also a good idea to check what features the provider offers to ensure your banking app is as secure as possible, minimising the impact if your phone gets stolen. For example, many digital banks have location-based protections to prevent fraudulent payments where the location of the card and the app don't match. Others use biometric technology such as your voice and face to secure the app.
- Find out more: how safe is online banking?
source https://www.which.co.uk/news/article/starling-launches-its-first-savings-account-how-does-it-compare-to-other-challenger-banks-aYnAb4O2gEar