- How confident are you that the interest rate offered today will still be competitive in a few years? It may be worth looking at the historical competitiveness of the rates paid by the institution you are considering.
CASE STUDY: A CLEAN BREAK FROM YOUR BANK
The National Benevolent Society of Watch and Clockmakers switched its account from a high-street bank to the high interest-paying CAFCash Account earlier this year.
Honourary treasurer Keith Angliss says: "We'd had an account with the high-street bank since 1916 but it wasn't paying interest and it was charging us for the cheques we were issuing, so I decided to look around and see what high interest accounts were on the market."
The key benefits the society was seeking, says Angliss, were an account with low or zero transaction charges and one that paid a decent rate of interest.
"The charges issue was important because we issue around 200 cheques to elderly beneficiaries each quarter, which was costing us £900 a year with the high-street bank."
By switching to CAFCash, the society is no longer paying those charges and receiving a relatively high rate of interest, as well as getting a cheque book.
The society's balance ranges from around £5,000 to £25,000, depending on the time of year.
Angliss says: "I think many of the relationship managers at the high-street banks still do not really understand charities, whereas a specialist provider such as CAF has more knowledge of the sector."
But there are barriers for charities considering changing accounts, he says.
"A lot of charities have banked with the same organisation for decades but they don't consider changing accounts because of inertia.
"They worry about the bureaucracy and the inconvenience of having to provide a lot of information to the new bank and the fact that you have to wait until you're sure cheques from the old account have all cleared before opening the new one, and so on."
For many years, Kew Gardens did all its day-to-day banking with the Co-operative Bank. But when its head of finance Rebecca Bower discovered that a high-interest cheque account from Cater Allen would offer a better rate than the Co-op, she decided to move the Royal Botanic Gardens' surplus funds to the private bank.
"The advantages of the Cater Allen account are instant access and its rate seems to have remained competitive, which means I don't have to keep checking up on it, and that's a benefit for a small charity like us,
Traditionally, for larger sums, the money market investments (short-term investments in fixed-interest securities) provided by the retail banks have paid better than savings accounts. But in today's low-inflation, low-interest-rate climate it makes more sense than ever before for charities to consider high-interest and savings accounts for their spare cash.
But which product should a charity choose, given the range of accounts available? Much will depend on the size of sums the charity is expecting to hold, how speedily it may need to withdraw funds, whether it wants a cheque-book facility, and other factors, such as whether it needs an account for the pooling of branch savings. It is quite possible for charities to keep their current account with a high-street bank for day-to-day banking, but open a savings or deposit account with another institution.
In recent years, a number of specialist charity accounts have been marketed by small, private banks. Other interest-paying accounts include the Charities Aid Foundation's CAFCash account and CCLA's COIF Charities Deposit Fund.
Some accounts are even offering to make donations as part of their service.
The First Independent Direct/Standard Life Bank charity accounts, for example, pay 0.05 per cent of the value of the balance to the charity each year, as well as relatively high interest rates.
"We're finding a lot of interest in our accounts because interest rates are low, so charities are comparing products,
says Ian Brewer, who handles the account at First Independent Direct.
Generally, the high-street banks pay lower rates on their deposit accounts than some of the other providers but they offer the convenience of branch networks and the simplicity of keeping all the charity's cash management within one institution.
But, in general, when it comes to high rates for deposits, the retail banks cannot compete with specialist funds such as the CAFCash Account and CAF Gold Account. CAF, as a charity, does not pay shareholders and can offer a higher interest rate.
Peter Mitchell, head of banking at CAFCash, says: "We're adding about 200 charities a month to our client list. Many of them will open up a high-interest account with us while keeping another account with someone else, but then end up doing most of their banking with us."
While most private banks focus on investment management for charities some, such as Cater Allen, Leopold Joseph and Investec, also offer savings accounts. They argue that not only do they pay good rates but they also offer a personal relationship service to their charity clients.
"We're different from the high-street banks because when you deal with us you have a named individual to contact,
says Paul Tanner, banking deposits manager at Leopold Joseph.
The strategy of the private banks varies. Some offer accounts with cheque books but Investec, for example, is clear that its Direct Reserve account is not attempting to compete for day-to-day banking services with the high-street banks.
"That side of things is well catered for by the big retail banks and we're concentrating instead on offering a very good interest rate for savings,
says Linda McBain of Investec's banking division.
She adds that because the Direct Reserve rate is pegged to the Bank of England's base rate, investors can be confident that they will receive a good return and do not need to constantly monitor the account.
But the private banks' accounts may not be appropriate for smaller charities, however, as there is usually a minimum balance of £10,000 or £25,000, although Cater Allen's minimum is just £5,000.
Andrew Robinson, head of community development banking at NatWest and the Royal Bank of Scotland, disputes the claim that the high-street banks do not offer relationship banking: "We've got 200,000 charity clients with turnover of less than £1 million and probably a quarter of them have a relationship manager.
"Having a relationship manager is important for some, but it's only one way to relate to a financial services company. Most organisations at the bottom end of the sector are perfectly happy with the service they get at their local branch, and others are increasingly keen to use phone, PC and internet banking."
Peter Burrows, senior manager at Lloyds TSB's public and community division, says charities must consider their cashflow needs: "If they put sums away for one or three months and then find they need to make a sudden withdrawal, they'll be penalised,
he says. "Similarly, with postal savings accounts they need to ask themselves how long it will take to process transactions and the possible costs of making electronic transfers."
Charities with branches throughout the UK may need to make special arrangement.
The Royal British Legion, for example, has an arrangement with Barclays.
"We had 4,000 branches, each with their own account, but we've been able to pool the funds, which pays us a higher interest rate even though the funds are still available at short notice,
says British Legion's finance director Roger Foreman.
Some of the smaller banks also offer these kinds of services. Cater Allen, for instance, has an "umbrella account".
Senior manager Mark Christopher says: "This allows the charity to link a number of different accounts and for the finance director to know what the combined value of those accounts is.
"Each branch gets a cheque book and the head office gets regular reports on transactions."
While it is advisable for charity finance directors to monitor the rates they are getting, some will shop around and constantly change accounts in order to get the best rate.
Leopold Joseph's Paul Tanner says: "These clients are not interested in developing a relationship where we can help them with their investments in the long term, but they're just trying to gain an extra £100 here and there. Frankly, we can do without them."
For finance directors who do not have the time, or the inclination, to constantly monitor interest rates, it is a good idea to look at the historic level of interest paid on a particular account.
Mike Goddings, relationship manager at CCLA's COIF fund, says: "We've historically offered a very competitive rate. Accounts can be launched with high headline rates but over time those may fall."
When it comes to the kind of services offered by the products targeted at charities, they range from straightforward savings accounts to high-interest accounts offering cheque books and day-to-day banking facilities.
Charities should assess their requirements before choosing an account.
Cater Allen's account offers a cheque book and standing order and direct debit facilities. But, as Christopher says: "There are some services we don't offer, such as cash handling."
Leopold Joseph, on the other hand, has an agreement with HSBC, which enables it to offer such services.
Similarly, charities must look at how many transactions they expect to carry out as they may be charged for some of them. Leopold Joseph's deposit account is limited to five transactions a month, although its instant access account, which pays lower rates, offers 100 transactions a month.
Charities considering changing their accounts or opening a new high-interest account need therefore to consider what their specific needs are before jumping in. But if carried out carefully, changing accounts could end up bringing in valuable extra funds in the long run.
POINTS TO CONSIDER WHEN OPENING A HIGH-INTEREST ACCOUNT
- Think about your cash-flow needs. Are you comfortable with notice periods of a month or more, which will mean higher interest, or do you need quicker access?
- How many deposits and withdrawals are you likely to make? The number of free transactions offered by accounts varies considerably.
- Do you want to run a savings account separately to your current account, which could mean lots of transfers of funds, or would you be happier with the flexibility of a combined account, which will probably pay lower interest?
- How important is having a convenient branch network, which would tend to favour the services of high-street banks, or would you be happy with phone or postal banking?