For now, the bank said that the negative interest rates would only apply to money held in current accounts of business customers, not their savings accounts or other types of accounts.
While only business customers will be affected, doing so sets a scary precedent, diminishing profits in the business sector and causing millions of retail customers to fear that the same treatment could also be applied to them. Even worse, if a prestigious bank like Natwest charges negative interest rates, other banks are likely to follow suit and also charge them as well. Eventually, if it spreads, everyone holding cash at a bank in the UK would have to pay interest to have their money held instead of earning interest on it.
Bank Exit for Customers
Baroness Ros Altmann, who served as the UK’s Minister of State for Pensions from May 2015 until July 2016, explained that people want to keep their life savings somewhere safe, and feel that the banks are still the main place that they can do that. However, people aren’t going to keep savings there if the banks start charging them for keeping their money, especially because “every day you have it there it is worth less and less.”
Altmann:
Negative rates would be very dangerous, especially for ordinary savers – the danger is many people will just think, I’m going to put the money under the mattress. That could have security risks, especially for older people.
She added that negative interest rates on bank accounts would particularly threaten the financial security of older customers who may be saving and relying on money in their bank accounts for retirement income.
Bank of England’s Low-Interest Rates Blamed
Natwest is blaming this potential negative interest rate decision
on the lower-than usual interest rates imposed by the Bank of England (BoE). The central bank’s tiny rates were putting
immense pressures on Natwest’s finances, the bank claims. Because of BoE’s low rates, many banks in the UK such as HSBC, the Post Office, and First Direct also offer rates as low as zero on their savings accounts.
A director of a savings comparison service called Savings Champion, Anna Bowes, said:
Currently you get virtually nothing on savings accounts because the big banks don’t really want savers’ money.
Savers will be penalized for keeping money in their accounts if interest rates fall into negative territory. This could happen if the Governor of the Bank of England, Mark Carney, cut Bank rates to 0.25 percent after it has been held steady at 0.5 percent for seven years.
A Natwest spokesman said that “We will consider any necessary action in the event of the Bank of England Base Rate falling below zero, but will do our utmost to protect our customers from any impacts.”
Opportunities for Nonbanks
When banks are offering little to no interest on savings, people have historically looked for alternative ways to store their money. With the explosion of FinTech and Bitcoin startups offering competing services to banks, this year, bank customers will have a vast buffet of apps and service providers to turn to.
Bowes predicted that if rates go negative, there would be many bank alternatives this time around, waiting to obtain licenses and begin offering savers higher rates, therefore increasing competition for banks.
“Whether you are a business, and individual, or a charity you always need to be seeking the best interest rates that are available,” explained Bowes. “Those pockets of competition are a lifeline for savers.”
Moving their savings to Bitcoin instead would be an immediate solution for UK savers, since there is no interest rate charged on holding bitcoin in any of its forms today. Access to Bitcoin for UK citizens is among the best in the world with at least ten liquid exchanges trading bitcoin for Pounds.