BANKING: A Question of Balance

Patrick McCurry

As well as a high street current account, the day centre has two deposit accounts with Scottish Widows - an instant access Treasury Tracker Account and a 60-day notice account paying a higher rate.

"We use the high street account for our day-to-day needs, but transfer money that is not needed immediately into the deposit accounts."

Smallwood chose the Scottish Widows accounts after studying the personal finance pages in the press. "If you follow the pull-out finance sections over a period of time you get a feel for what's going on in the market and who is offering a good deal."

Too many charity treasurers simply stick their money in a low-interest paying account and forget about it, says Smallwood. But that approach can be disastrous for a small charity if a crisis occurs.

"There have been other day centres in this area that have run into problems because they didn't get as much money from the local authority as they were expecting. But if you have funds in a high-interest account, you do have some cushion if times get tough."

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In an ideal world, charities would combine the banking convenience of the high street with the higher rates of interest offered by deposit accounts. Patrick McCurry investigates the options.

In today's low interest-rate environment, charities are having to take even more care to get the best return on their savings. As the funding environment for charities gets ever tougher, many treasurers are recognising that funds not needed in the short term should be generating a competitive return.

Of course, most charities will have a day-to-day current account with a high street bank, which they don't expect to pay significant interest.

But for funds that are not needed on a weekly basis, it makes sense to look for an account offering a higher rate of interest.

The options facing charities include finding a current account that pays interest, or a deposit or savings account that pays a higher rate but may not come with a full banking service. Other criteria to consider include whether the charity is happy to have a notice-period account or whether it wants instant access - and what level of balance it expects to maintain.

Of course, the charging structure will also be a key factor to consider.

Some accounts offer a certain number of free transactions each month, but then charge for any further transactions, while others offer a different fee framework.

Charities need to look carefully at how they wish to use the account, as high charges can offset the better rates of interest.

That said, the overriding aim of most charities, when it comes to deposit accounts, is getting a good interest rate, says Sue Cooper, loan manager at Triodos Bank. She adds: "There are not that many charities that have a large sum they can put aside and forget about, but there are many that receive grants in advance and want to get the best return until they need to draw on them to fund their work."

But, at the same time, there are many voluntary organisations that are not making their spare funds work for them, according to Terry Marshall, banking operations manager at the Charities Aid Foundation. "There are tens of thousands of charities with current accounts at high street banks, paying very little in interest, but who don't seek out high-interest accounts with other providers."

There are two main reasons for this, says Marshall - ignorance and inertia.

Many treasurers, particularly at smaller charities, are simply unaware of the range of high-interest products on the market, even those like the CafCash Account that are specifically targeted at the charity sector.

"I'm a trustee of a charity and before I came to work at CafCash we didn't know about it, and I'm sure a lot of charities are in the same position."

Inertia is another reason charities stick with what they know. "A charity may make a decision to move accounts, but it can take a long time for that to happen, especially if there's a change of treasurer or something like that. Charities are also put off by the prospect of having to change standing order arrangements if they're moving to a new account," he adds.

The CafCash Account now provides full banking facilities. In the past, because it was unable to offer petty cash facilities, it used to recommend that customers retain a current account with a high street bank. But a few months ago, it launched cash-point cards that can be used at HSBC machines. "Now we're telling our customers they don't need another account to run alongside ours," says Marshall.

He adds that it is essential for charities to examine the charges incurred on the accounts they are considering. "We aim to keep charges down to a minimum, so that the charity holds on to as much money as possible for its activities. For example, we only charge £5 for a 'Chaps' same-day electronic transfer, while many other providers charge £25."

Like the CAF accounts, the COIF Deposit Account managed by CCLA, is directly targeted at charities. It offers a rate that is typically much higher than that offered by the high street banks, as CCLA relationship manager Mike Goddings explains. "We see high street banks and other financial institutions occasionally offering high rates but they tend to be temporary and not sustained over a long period. Either that or they come with particular terms and conditions, such as notice periods or minimum balances."

Administrative burden

Such conditions, he argues, can impose an extra administrative burden on charity finance directors or treasurers: "They need to keep a constant watch on how much they keep in those accounts to ensure they're not losing out."

And many charities, such as Evesham-based John Martin's Charity, need instant access. The charity, which makes grants to local organisations, uses the COIF account, as well as a CAF account and one with Cazenove, to deposit income from its stock market investments.

"Several times a year we draw down income from our long-term investments and put it in one of our three deposit accounts, so that we have cash flow to fund our work," says clerk to the trustees Phil Woodcock. "We have a high street bank account for our day-to-day banking, but we need a high-interest account to get the best return as well," he says.

He adds: "Recently, the COIF account has offered a slightly higher rate than the others so we've tended to use that more."

While CafCash's Marshall acknowledges that COIF tends to pay slightly higher rates, he points out that the COIF account is purely a deposit account, whereas the CafCash Account offers a full banking package. "When it comes to full banking accounts, we offer a much better rate than the high street banks," he says.

Triodos Bank, which markets itself as an ethical bank, offers a current account with interest. The rate is 0.76 per cent for balances greater than £5,000 and 1.51 per cent for £25,000-plus. It also offers deposit accounts paying a higher rate.

Triodos' Sue Cooper says: "We offer a competitive rate on our deposit accounts but not the highest. But we do offer added value in that customers know we will be lending their money to organisations pursuing social objectives."

She adds that there is a distinction between Triodos' two deposit accounts, the Simple Reserve and Value Reserve. The Simple Reserve is an account from which the customer transfers funds to another account in the same name. The Value Reserve is for customers who want to make transfers to a variety of different accounts. The reason for the distinction, says Cooper, is a requirement of the Financial Services Authority on validating signatories; the FSA requirements are far less onerous for the Simple Reserve than for the Value Reserve.

Procedures to prevent money laundering have been in place for many years but were tightened following the 11 September terrorist attacks. Since then, the FSA has fined organisations, including the Royal Bank of Scotland, for not carrying out checks on new customers.

Marshall says the changeover when the new rules were brought in was "horrific" and slowed down the whole process of opening an account because prospective customers were asked to provide a number of documents for identification.

"We found many people were sending in the wrong documents or failing to comply with the regulations, so now we tell people that they won't be able to operate a new account until the checks have been made."

Background checks

Paul Tanner, banking deposits manager at private bank Leopold Joseph, says it is essential that banks carry out the appropriate background checks on prospective customers. "We identify who is behind the charity, who the beneficiaries are, and other issues, such as whether it is registered with the Charity Commission."

Tanner argues that private banks like Leopold Joseph can provide charity clients with a more personalised service than the high street banks: "We don't force people to go through a call-centre system, but instead ensure that our customers get to speak to their personal manager straight away."

The private banks, however, do tend to target the higher end of the charity banking market and will often require balances of at least £5,000-£10,000 in their deposit accounts.

"We're looking for charities paying in higher amounts from time to time, rather than those who want to pay in small sums very often," says Tanner, adding that many of the depositors in Leopold Joseph accounts will also have a current account with a high street bank.

For charities keen to get the best return on their money, there are a range of options and the right choice will depend, for the most part, on each charity's individual needs. For some, a high-interest current account may be best, while others will prefer to transfer funds regularly from a high street current account to a deposit account with another provider.

Whatever the choice, it is important that charities regularly review their arrangements, says CafCash's Marshall: "Charities need to maximise the funds they have available for their work, and making sure they're getting a competitive return on their money is a key part of that."

CASE STUDY: ST LEONARD'S DAY CENTRE, BIRMINGHAM

The St Leonard's Day Centre in Birmingham is used by older people and receives most of its £70,000 funding from the local authority. It runs on a tight budget and needs to fundraise for 10 per cent of its income, says treasurer Richard Smallwood.

"Getting a good interest rate on savings can mean the difference between making a loss and making a small surplus."

"The kind of interest rates many high street banks offer is appalling," he says.

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