Banks fail to pass on £7.5bn in interest to SMEs

23rd October 2023

Small and medium-sized businesses are losing out on £7.5 billion each year because banks are failing to pass on higher interest rates to companies with savings according to research by Allica Bank.

The study of the business savings market by Allica Bank found that banks are systematically offering larger companies better savings rates while small firms have £150 billion of deposits sitting in accounts offering no interest at all.

Average savings rates for smaller companies are 2% lower than for their larger counterparts, costing them £2.5 billion a year. When combined with money in accounts offering zero interest, small and mid-sized groups are being denied £7.5bn annually. 

The hidden savings penalty includes SMEs being denied the same higher savings rates that larger companies are routinely offered by the big banks.

There are approximately £275bn of SME deposits in the UK. By analysing official Bank of England interest rates alongside interest rate data from individual banks, Allica’s new research has found that £150bn of SME deposits are in current accounts that offer no interest at all – when SMEs are being offered far higher rates by challenger banks, including the 3.5% instant access rate Allica is currently offering SMEs for regular savings.

£125bn of SME savings are in accounts offering interest, but are subject to a hidden SME penalty because big banks are routinely offering large companies higher interest rates on their savings compared to the rates they offer small businesses.

The average difference between interest rates offered to large companies compared to SMEs is currently more than 2% (covering both instant access and term/notice deposit accounts).

Overall, this means that SMEs are collectively being denied more than £7.5 billion in savings interest annually with £150 billion being denied 3.5%1 savings interest = £5.25 billion. £125 billion being denied on average 2% higher rates available to larger companies = £2.5 billion

The variation in interest rates offered to companies of different sizes is driven by big banks exploiting the lack of transparency in the market. These banks also take advantage of the fact that small business owners rarely have time to shop around to get a good deal, unlike the treasury departments of corporate customers.

Allica has written to the Chair of the Treasury Select Committee, Harriet Baldwin MP, and other Committee members, calling for the Committee to look in closer detail at the UK’s business savings market to ensure:

• all banks are doing their level best to pass on interest rate rises to small firms

• small business owners are treated fairly compared to larger companies

• far greater levels of transparency are introduced into the savings market for SMEs

• Financial Services Compensation Scheme (FSCS) limits are not enabling banks to keep

interest rates low – and consider if current FSCS limits should be increased from £85k to £250k for small firms to remove any potential fears SMEs may have of holding large balances with one single bank.

Allica is calling for there to be a much greater focus on savings rates for small businesses, in the same way there has been from politicians and regulators on savings rates for consumers.

Richard Davies, CEO of Allica Bank said “Allica’s mission is to transform banking for established SMEs. Sadly, despite these businesses being the engine room of the economy, contributing a third of GDP, they have been neglected for too long and business banking is increasingly impersonal, inconvenient and poor value.

“Our research shows this is particularly true for SME savings, where SMEs are getting a raw deal with the big banks – it’s a scandal they’re missing out on more than £7.5bn of interest on their hard-earned cash every year.”

“We’re determined to drive change in the market – Britain’s established businesses deserve better.”