THE BLOG

Stock Market and Bank Deposits Leave Savers High and Dry

22/10/2014 10:42 BST | Updated 21/12/2014 10:59 GMT

It is hard to believe that the UK stock market reached its peak almost 15 years ago. It had been driven to heady heights over the previous two years by a sudden excitement for technology, media and telecoms shares. Companies in other sectors saw their shares rise sharply too if they announced anything that suggested that they might benefit from the internet boom.

Crowdfunders do what the banks do - but more efficiently and less expensively

In retrospect, the market was right. The internet did change the world forever. Most holidays are now bought online. Car insurance is another area that has largely moved online and most people pay their bills using online banking. Investment is an area that has been slower to move online and 'fintech' is seen as the new hot area in the US currently. My new business, Money&Co., is a fintech business.

Crowdfunders connect investors who want a better rate of interest on their cash with companies that need to borrow money to fund growth. Banks take deposits from individuals and lend them on to companies and other individuals, keeping a substantial margin. Although I can only really speak for my own company, I sympathise with the view that crowdfunders do this more efficiently and less expensively.

Most UK deposit accounts yield around 0.7% per annum and even if you commit your money for longer periods, the most you will get is 2.6% per annum.

Deposit Accounts V Crowdfunded Loans

Security - Bank deposit accounts are protected by the Financial Services Compensation Scheme (FSCS), which safeguards deposits up to £85,000. The extra security of the FSCS may be very attractive to some. The guarantor of the £85,000 of is effectively the UK government. Crowdfunders, even Money&Co., which is a icensed independent financial adviser answerable to the Financial Conduct Authority, do not offer such security. But lenders can take comfort in the fact that a debenture, a legal charge, can taken on borrowing companies' assets to protect lenders. And of course its important to ensure that a crowdfunders' credit-analysis is rigorous.

Access - Do you need access to your cash in the short term? If so, the fixed-term provisions of long-term deposit accounts may seem onerous. Crowdfunding loans can be for as short a term as one year. Many are longer, with a maximum term of five years. But if you want to take your cash back early, you might want to find a crowdfunder with a loan auction market. This means that you can sell your loan at any time to another lender.

Yield - Deposit accounts are linked to long-term interest rates, which are a lot lower than the yields offered by our borrowers. Crowdfunded loans typically have a much better yield.

There is a myriad of internet-based businesses, but there is no doubt that the development of online financial services businesses has a long way to go.

The UK economy is finally experiencing growth after the Great Recession, but the recovery is fragile. Small and medium-sized companies need access to borrowing in order to maintain momentum and the banks are still reluctant to increase their exposure to this segment of corporate lending. By lending to companies, always providing you are aware of the risks, you can help to support British business and get a very attractive rate of interest on your cash.