Are Internet Savings Accounts Safe?
When it comes to savings, market-leading internet accounts often offer the highest rates. But is it safe to stash your money away with them?
Internet savings accounts are always grabbing headlines with high-interest rates that are set to get our wallets salivating.
The trouble is, many of them are offered by previously unheard-of banks, such as HiSAVE and Icesave, who - it seems - have sprung out of nowhere to regularly top the best buy tables.
Naturally, many of you in the Fool community have mixed feelings about these seemingly-new, bargain banks. Some of you have concerns about how safe putting your money into these institutions are, while others have flagged up efficiency issues.
Either way, most of us are still in the dark about who these fresh faced account-providers actually are. Can you trust them? And more importantly, is your money safe?
Lifting The Savings Veil
Here are the top five instant access accounts currently available on the market, together with a bit about their history:
Product Bank Provider Rate Offered History
FirstSave
FBN Bank UK Limited (subsidiary of the First Bank of Nigeria).
6.5%
The First Bank of Nigeria Plc was founded in 1894 by Sir Alfred Jones, a shipping magnate from Liverpool. Its UK subsidiary, FBN UK Limited began trading in November 2002. It mainly managed money for businesses and wealthy individuals until last July, when it launched its online savings arm, FirstSave.
HiSAVE
ICICI Bank
6.41%
The Industrial Credit and Investment Corporation of India Limited (ICICI) was first incorporated in 1955 by the World Bank, the Government of India and representatives of Indian industry. Today ICICI Bank is the largest private bank and the second largest bank in India. Its UK subsidiary was launched in 2003, with the bank also forming an affiliation with Lloyds TSB in 2005 through its India Banking Service.
Internet Saver
Bradford and Bingley
6.4%
Bradford & Bingley Building Society formed in 1964 as a result of the merger of the Bradford Equitable Building Society and the Bingley Building Society, both of which were established in 1851. In December 2000, the society floated on the London Stock Exchange and the bank, Bradford & Bingley plc, was formed.
e-SAVER
Principality Building Society
6.3%
Principality is Wales's largest building society. Founded in 1860, today it is the 12th largest building society in the UK.
Icesave
Landsbanki
6.3%
Landsbanki is Iceland's oldest full-service commercial bank. It opened for business in 1886, acquiring London-based Heritable Bank in 2000. It launched the Icesave account in October 2006.
If you're like me, then you've probably never heard of four out of the five in the table. Most controversial perhaps, is the table-topping First Bank of Nigeria.
Nigeria has had a bad rap over the years, primarily because of the number of scams and phishing emails which have been sent from its shores, in some cases masquerading as being from the bank itself.
But don't judge a bank by its name. Go by the facts - and don't be put off if the bank originated in another country. For example, did you know that ING Direct is the UK arm of the Dutch bank ING? And yet ING is now a well-known and well-trusted brand after pioneering the high-rate, no frills savings account in 2003.
To put it simply: xenophobia can cost you dearly if you're a saver looking for a great rate.
A 35k Guarantee
The first thing to point out is that all five of the banks mentioned above are regulated by the Financial Services Authority (FSA).
This means if the bank collapses, you will automatically be covered under the Financial Services Compensation Scheme, which guarantees savings up to £35,000 per institution.
If you want to check if a financial institution is regulated by the FSA, the FSA Register will tell you if and when the institution became authorised.
Unsure of the institution name? (For example, if you typed `First Bank of Nigeria' into the FSA register it comes up as `no longer authorised', whereas the correct name of FBN UK Limited correctly states that the bank is authorised.) Then you can always ask the institution directly for its Firm Reference Number.
This unique number is comprised of six digits, and will immediately pinpoint the institution you are after.
The FSA also publishes a list of unauthorised internet banks which offer banking-type services, none of which are authorised by the FSA. If you come across one of these companies, you should be on your guard, as you will not be covered under the UK compensation and complaints schemes if anything goes wrong.
Bank On The Code
If you want to see if your bank or building society goes the extra mile, you should also check if it has signed up to the Banking Code.
The Banking Code is a voluntary code which sets standards of good banking practice to protect personal customers in the United Kingdom.
Following a review, the code is set to change in March 2008. Among the changes, there will be greater clarity for customers opening products such as savings accounts, and more help for those facing financial difficulties.
There are some who argue that the banking code doesn't go far enough, with rules that are often too open for interpretation to have any real impact. Still, it's a good starting point.
Banking Code subscribers can be found on the website. Again, all five institutions in our table have subscribed, with ICICI finally signing up last October.
Don't Bank On A Bank You Know
Whatever your concerns and questions about these so-called `new' banks, you only have to look at banking giant Citigroup, which last week announced a £9.2 billion sub-prime writedown to see that it's not just new banks that can hit muddy waters.
And do we even need to mention our good friend Northern Rock? Say no more.
So don't shy away from stunning internet savings rates to stick with the provider you know and assume is safer. Simply make sure the bank or building society offering the internet account is regulated by the FSA, and spread your savings around sufficiently so you are fully insured should misfortune strike.
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