Banking on the future

By at home

Banks and building societies used to be highly visible cornerstones of our towns. In a way they still are even though today they offer time-honoured services to customers in a very futuristic way.

Our introduction to the world of money outside of our homes is the bank and the building society. For most of us the bank is where our pay goes and, until more recently, the building society was where we went for a mortgage.

Today those institutions have mixed and matched their services and added online facilities. While in essence the traditional roles remain the same, the customer has a great choice – and arguably more chance of being baffled by what is on offer.

In recent years banks and building societies have diversified and a number now offer, among other services, current accounts, credit cards, cash machines, travel money, unsecured loans, various types of insurance and estate agency services.

A building society is a mutual institution. This means that most people, who have a savings account, or a mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings. Each member has one vote, regardless of how much money they have invested or borrowed or how many accounts they may have. Each building society has a board of directors who direct the affairs of the society and who are responsible for setting its strategy.

The way building societies differ from banks – which are companies normally listed on the stock market and are therefore owned by, and run for, their shareholders – is that societies have no external shareholders requiring dividends. They are not companies.

But as it is a competitive market, building societies have started to act more like banks offering a similar wide range of financial services, including personal banking, loans and so on. Government legislation, however, states that 75 per cent of a building society’s total business must be devoted to residential mortgage loans and related products, such as home equity loans.

To capture the mortgage and loans market, the banks are offering competitive rates in a bid to win custom.

So how should we use these institutions? The first priority over and above your everyday banking needs should be a deposit account – offered by either of them – so you can build up a fund to deal with an unexpected household bill, a sudden tax demand, or helping towards the cost of a summer holiday. This readily accessible "emergency" cash fund makes good sense. The fact that such a secure cash fund can also earn you an attractive rate of interest in the meantime – even in today’s low interest rate environment – is a bonus.

Deposit accounts now come in many forms so it pays to do your homework before deciding which one to take; in particular scrutinise the terms and conditions. The entry of new players into the cash deposit market has increased competition, resulting in some attractive deals for savers prepared to shop around. Some new players are using the cost savings of the Internet (more on that later) to offer better rates for investors who do all their transactions online.

On offer are a variety of different savings products, ranging from instant access accounts through to higher interest accounts where you need to give notice before being able to withdraw cash without incurring interest penalties. Generally, the longer you are prepared to wait to make withdrawals from your account, the better interest rate you will get.

Many accounts now also offer a monthly income option, which can be useful for people looking to boost their income on a regular basis.

When picking a particular deposit account, ensure it is the one for you. There is little point, for example, in putting all your spare cash in an instant-access account that gives poor returns when you could put a big chunk of it into a notice account earning a more attractive rate of interest.

Similarly, there is little merit in placing money in an account with a restriction on the number of withdrawals you can make, if you know you are going to be dipping in to the account on a regular basis.

Interest earned from savings accounts is paid to savers net of tax at 20 per cent. For lower or basic-rate taxpayers, there is no further tax to pay, but higher-rate taxpayers have to pay an extra 20 per cent. The only deposit account where interest is not taxed at source is an Individual Savings Account (ISA). Here, your interest accumulates gross, i.e. without any tax to pay, but the amount you can invest this way is capped by the government.

The old days of opening a building society or bank account, creating a bond of loyalty between you and them and thereby being offered a mortgage when you wanted one, are long gone. Today it is a battle of rates and it is worth shopping around banks and building societies for the deal that best suits you – be it fixed rate, cash back or whatever.

And so to the modern phenomenon that is Internet banking. More than seven million people are using it in the UK and the banks are happy for more people to sign up because it means no more costly branches to run, cheaper overheads, and less staff.

The online banking sector has two distinct branches. The standalone bank that operates almost entirely on the Internet – Egg, Smile, Cahoot, Intelligent Finance, etc. Everything that can be done online is done that way and non-Internet communication is kept to a minimum. Back up comes with telephone support but if you ask for information that is available via the Internet you are likely to be charged for it.

The alternative is the cyber branch – the online operation of an existing high street bank and/or building society. These banks offer online access as an additional service that supplements, rather than replaces, branch and telephone access. The products, rates and charges mirror those available through the traditional branch operation.

If you are an existing customer and your bank has an online operation, getting access should be as simple as registering for the Internet service and being issued with an ID and password. It takes the banks around one week to process your registration.

Consumer confidence is growing, helped by the ability of out-and-out Internet banks to offer better interest rates on credit cards and savings accounts.

The most obvious benefit of Internet banking is the convenience. This is a 24-hour-a-day, seven days a week service that saves time and effort. It is also more instant, allowing you to keep more up to date with your finances because transactions are usually updated in real time.

The biggest block for most people, however, is security with most customers saying that fears over hackers breaking into their accounts and spending their money is the chief concern. Banks, however, are constantly improving their security and no major fraud has yet been reported.

Security is also down to the customer and there are some musts that need to be observed. Keep your password secret; always use the latest version of your Internet browser; log out immediately you have finished your transactions; never send emails containing your passwords or account numbers; make sure that the computer you are using is free from electronic eavesdropping; make sure that you are not being watched while you are online.

Finally never ever give your bank details out online. There are a number of scams operating where bank customers receive official-looking and reading emails purporting to be from the bank. They ask for personal account information. Under no circumstances reply and NEVER give this information to anyone

Ultimately Internet banking will stand and fall on the quality of service it can offer. And does banking on the Internet still have the edge now it is not so much of a novelty?

The answer is yes, and the good news is that there are still ground-breaking deals to be had. It is a case of doing the research and finding the account that best serves your needs.

Banks and building societies may look different today but at heart they are the same as they always have been – money factories.

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