After a bumper year, what's next in the savings and investment market?
Over the course of the pandemic the UK's financial habits have changed, which is no surprise when you see how people's circumstances have been impacted:
Three in eight adults in the UK (38% or 20.0m) have seen their financial situation overall worsen.
Half of adults (48% or 24.9m) have not been affected financially by Covid-19.
One in seven (14% or 7.5m) have seen an improvement in their financial situation overall.
As we enter the new tax year, and the pandemic's course progresses, which new habits will stick around and which old ones will people revert to?
Setting the scene...
We saw a surge in the amount of money put into saving accounts in 2020 thanks to reduced opportunities for spending and widespread uncertainty. The UK's savings ratio, the percentage of disposable household income that is saved, rose from 8.6% in Q1 to a record breaking 27.4% in Q2, dropping to 16.9% in Q3 as more areas of the economy reopened.
The amount of money invested by consumers also boomed, with trading sites and apps proving particularly popular. Hargreaves Lansdown saw a 40% increase in net new business in H2 2020, while Trading 212 had to suspend new account openings in February 2021 due to overwhelming demand.
What will 2021 bring in the savings and investment space?
Accepting that widespread economic uncertainty remains, particularly as Brexit bites, there are some predictions we can make with reasonable confidence.
Customers are going to keep looking for the best place for their savings
More people have developed a saving habit thanks to increased disposable income and greater time to research different products. That means more people will be willing and able to search the market for the best deal for them, a situation compounded by very low interest rates and particularly relevant as we enter the new tax year, when consumers start hunting for the best ways to make the most of tax allowances.
The ability to open many accounts instantly online further increases the likelihood of customers moving their funds. That means banks run the risk of losing customers' deposits, while being left with empty "ghost" accounts that are unused, but which they have to maintain.
The incumbents should take note of the newcomers' commitment to holistic propositions and excellent customer experience — there's a lot they could learn.
Providers are going to have to work harder
Historically, banks have competed on interest rates and relied on customer apathy to attract new depositors and maintain existing account holders' loyalty — but the state of their balance sheets and central bank rates, means they now can't afford to do that even if they wanted to. So they need to be creative.
Halifax, Nationwide and Natwest have turned to prize draws as an alternative, however these accounts from high-street providers come with baffling arrays of conditions and are rarely suitable for those with larger sums to deposit.
At the same time, newer providers like Plum, Chip and Hyperjar have built entire propositions centred on savings, but which also offer a wide range of tools and features to make users' money work harder for them.
They might be relatively small for now, but they have seen significant increases in customer numbers over the past 12 months — Plum's customer base doubled. The incumbents should take note of the newcomers' commitment to holistic propositions and excellent customer experience — there's a lot they could learn.
Investment habits will change
The boom in investing has been driven by a perfect storm of; people having more money available to invest (and lose), more time to research products and services, the stock markets breaking records, and new apps and websites coming to market that make trading easier.
The balance of these elements will change over the next 12 months as national economies ride out the next phase of the pandemic, new investors learn more about how investing works, and newer investment products mature — or don't.
That means we can expect to see a slowdown in the growth in the number of self-directed investors, but not a decline in overall numbers. We will likely see continued diversification of the market's demographics and greater interest in themed funds from the likes of Plum, as investors gain more experience and look to diversify away from trading sites while still investing in causes close to their hearts.
A reckoning is coming
Much has been made about the fact that many who started investing over the last year weren't aware of what they were getting into. They didn't understand the complex financial products they were using, or the providers' business models and fee structures. In some cases, this had devastating consequences.
The result was action by regulators in both the US and UK which gave many providers, particularly the newer ones, pause for thought. Additionally, the systems of investment providers old and new, big and small struggled to cope with the huge increase in users. That lead to outages, followed by angry customers and even more reason for providers to take stock of their offerings.
The result will be changes to product offerings, such as a reduction in gamification features, more focus on stability and a greater emphasis on educating customers about the realities of investing from providers and regulators alike. This, along with newer investors gaining experience, should contribute to the reduction in numbers of those, participating in the market solely by trading, and a shift towards more balanced holdings.
The pandemic has fundamentally changed people's lives, and while we will come out the other side, its impact will stick with those of us who lived through it for a long time to come.
It has made some more cautious, and others more willing to take risks. It has made some richer, and others poorer. But ultimately, it has given people a chance to take stock — including of their financial situations.
While the nuances of people's savings and investment habits may fluctuate over time, one thing is clear — many are now more aware that their money should be working for them. And that's the part providers should take note of — consumers are increasingly armed with knowledge and expectations, and they won't hesitate to act as a result.
To combat any detrimental effects this may have, providers need to focus on putting their customers at the heart of their businesses and making sure meeting customer needs drives everything they do. They will be more successful because of it.