Halifax raises stakes in savings war with the telephone banks

The war among Britain's retail banks will intensify tomorrow when Halifax hits back against its rivals with an account offering some of the highest savings rates yet.

Andrew Verity and Lea Paterson report on the ferocious battle among lenders sparked by the arrival of telephone and supermarket banks.

Halifax will fire a shot across the bows of the telebanks which are enjoying an unexpected flood of customers rushing to get interest rates of more than 7 per cent before tax.

The bank, formerly the country's largest building society, will offer interest of up to 7.85 per cent - where pounds 40,000 or more is invested. Savers who put in over pounds 10,000 will receive 7.3 per cent before tax.

The move comes amid increasing evidence that telebanks - banks with no branches that offer telephone service and high rates of interest - are winning a significant chunk of the UK's pounds 500bn savings market.

The spread of telebanks has put the entire banking sector under pressure to hang on to deposits. But traditional banks and building societies have begun to despair as retail banking becomes much less profitable.

Woolwich will soon follow Halifax in launching a high-interest telephone deposit account. Standard Life Bank has received 25,000 inquiries and opened 10,900 new accounts in the 10 days since it launched on 5 January, taking deposits of pounds 73m. Tesco's banking arm, which opened just over a year ago, has 400,000 customers. Virgin Direct's "one-stop shop" banking and mortgage account, Virgin One, will also open to the public tomorrow, with 10,000 new customers set to join.

Mike Ellis, banking and savings director at Halifax, said: "We know that a growing number of customers like the convenience of having an account they can operate from their armchair and which will also reward them with competitive interest rates. This new savings account is a first for the Halifax as it provides the immediacy and convenience of 24-hour access."

The new telebanks were yesterday quick to attack the account. A minimum deposit of pounds 10,000 would also rule out many customers. Further, customers can only withdraw funds twice a year, and only to a Halifax account.

Meanwhile, savers with Halifax's normal, branch-based Liquid Gold account receive 4.3 per cent on pounds 10,000, falling to rates as low as 0.5 per cent on pounds 1 deposits. A spokesman for Tesco's bank said: "They are really competing for large deposits such as City bonuses."

Halifax, Woolwich and others are clearly alarmed by the success of the telebanks. Jim Spowart, managing director of Standard Life Bank, said: "What they are doing is tying money in. They are reacting but reacting selectively, and only offering better interest to some of their customers."

Halifax branch managers contacted Standard Life to ask what was going on after increasing numbers of customers applied to withdraw funds. "Banks and building societies have been put on guard. They have been told about us and asked to stop more money coming out," Mr Spowart said.

Martin Campbell, product manager at Virgin Direct, criticised Halifax's reliance on numerous different accounts. "From the number of Halifax customers who have contacted us, I'm sure they must be feeling the crunch. The mistake I think they are making is to try to use all the separate old jam jars as a way to compete. They are still trying to fight the war with out-of-date weaponry."

Traditional banks still cover most of their costs by offering lower interest to savers than they charge to borrowers. Margins are now being squeezed from both sides as mortgage rates are put under severe downward pressure.

Industry experts were yesterday unsurprised at Halifax's move. In recent years, established financial players, such as Halifax and the "big four" high street banks, have come under fire as low-cost competitors have entered the market, aided by new technology.

Unlike traditional financial players, these new competitors do not have expensive branch networks. Their low overheads allow them to offer far better deals than better established rivals and still make profits.

Philip Langguth, a analyst specialising in bank issues at Mitchell Madison Group, a business consultancy, said: "The Halifax move doesn't surprise me at all. If you look at the percentage of banked households in the UK, the only real way of attracting new business is to either play the pricing game or to work existing accounts more. It's another case of value going to the customer."

"Playing the deposit rate game on its own is unlikely to be successful", added Mr Langguth, who believes banks need to offer "a totally new concept" in order to persuade customers to switch from their existing accounts. "This is precisely what Virgin One is trying to do."

The UK's total market in personal savings is pounds 508bn, pounds 319bn of which is held in banks and pounds 127bn in building societies. A further pounds 62bn goes to National Savings.

Banks and building societies have also seen their share of the mortgage market slip. Despite offering unprecedented deals on fixed-rate loans, they have struggled to compete with mutuals on variable rates. Bradford & Bingley and Nationwide have vowed to keep their rates below 8.1 per cent if interest rates hold. Halifax and others offer 8.7 per cent or more.

Traditional lenders now maintain that home-buyers prefer mortgages with fixed rates. But even here they are coming under pressure. Savill's Private Finance yesterday launched a two-year fixed rate of 3.95 per cent. On a long-term loan of pounds 150,000, borrowers could save up to pounds 14,000 by switching to it.

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