Bank becomes first of many to slash interest paid to customers, as experts predict slowdown in switching current accounts. Millions of people holding Santander’s hugely popular 123 current account will see their interest rate halved on Tuesday.
The Spanish-owned bank is the first in a line of institutions to implement rate cuts, with some experts predicting this could put the brakes on current-account-switching activity, as consumers conclude that the rewards on offer mean that moving bank is no longer worth the hassle.
The 123 account is held by about 3.6 million people, who from Tuesday will receive a flat 1.5% interest on balances up to £20,000. Previously the account paid 1% on balances of £1,000 or more, 2% on balances of £2,000-plus, and 3% from £3,000 up to a maximum of £20,000.
Santander claimed in August that it was forced to make the reduction “to balance the economics of the product with the value offered to customers”. It added the cut reflected the fact that the money markets were now expecting interest rates to stay lower for longer.
The 3% interest rate made the account one of the best deals on the high street, resulting in it becoming the home for billions of pounds of savers’ cash. It is estimated that the average amount held in the account is close to £12,000.
Under the old terms, someone with the full £20,000 saved would have earned £600 a year in interest, but this falls to £300 under the new rate.
It is the second major blow to 123 account holders: in January this year their monthly account fee rose from £2 to £5.
The latest change does, however, mean that customers will now earn interest on balances below £1,000, which was previously not the case, while those with between £1,000 and £2,000 will receive more interest than before.
Santander is the first of a number of banks to cut in-credit interest rates for customers. From 4 January 2017, TSB’s Classic Plus account will no longer offer a generous 5% on balances up to £2,000. Instead it will pay 3% up to £1,500.
A few days later, on 8 January 2017, Lloyds will scrap the current tiered interest rates on its Club Lloyds account and bring in a single interest rate of 2% on balances between £1 and £5,000. At the moment this account pays 1% on £1 to £1,999, 2% on £2,000 to £3,999, and 4% on between £4,000 and £5,000.
Those holding the Halifax Reward current account will also receive less from early next year, with the monthly reward payment falling from £5 net (£6.25 gross) to £3 net (£3.75 gross) from 1 February 2017.
Andrew Hagger of financial website MoneyComms has said that the spate of rate cuts “could really put the brakes on current-account-switching activity”.