LHV launches first new current account in the UK for four years and offers 3.25% uncapped interest on balances
Britons will have another current account to choose from as LHV Bank, a fully licenced bank, has launched a new offering.
It is the first new current account to launch in Britain since 2021 when Chase Bank burst onto the scene, and it already offers savings accounts and loans.
LHV which has been operating in the UK since 2018, after establishing itself as the third largest bank in Estonia, received a banking licence in 2023 and has been developing its UK current account for a year and a half.
Erki Kilu, chief executive of LHV, told This is Money at its London HQ it is a natural progression for LHV to offer current account, as it already offers loans and fixed-rate saving accounts.
He said: 'For me real banking is making credit and making interest income. I can't imagine a bank without current accounts.'
As an entirely app-based bank, it is taking on the likes digital banking giants Starling, Monzo and Chase by offering customers 3.25 per cent interest on any balances held in the current account.
This rate tracks 1 per cent lower than the Bank of England base rate so it rises and falls with it.
Starling scrapped its 3.25 per cent current account interest on balances up to £5,000 in February, as did Chase with its 1 per cent current account interest.
The only other bank accounts which pay interest on current account balances at the moment are digital bank Kroo, which pays 3.15 per cent on balances up to £500,000 and also tracks 1 per cent lower than the base rate.
Nationwide's FlexCurrent account pays 5 per cent interest on balances up to £1,500 for 12 months. After that the interest is 1 per cent on balances after that up to £1,500.
With markets pricing in three more interest rate cuts by the end of this year, customers could find their current account interest slashed to 2.5 per cent, assuming the bank of England votes to cut the base rate by 0.25 percentage points each time.
However, the Bank of England's chief economist has warned it has been cutting rates too quickly.
That would still be better than earning no interest at all though.
There is a chunky £1million cap on balances which can receive interest in the current account, which seems like an expensive business for LHV.
But with the base rate at 4.25 per cent and commercial banks earning this rate on deposits held with the central bank, Kilu is not phased by this.
He says: 'It's not loss-making for us if we have higher sums. We keep it in the central bank.'
'If the amounts kept in current accounts are £1million then we need to keep them very liquid and can't use them for lending.'
As the Financial Services Compensation Scheme limit, which protects deposits if a firm fails, stands at £85,000 people don't tend keep sums bigger than this in accounts anyway.
Funds held in LHV accounts are protected under FSCS.
The average amount held in a current accounts paying no interest is £2,067, according to research from Paragon Bank.
If this were held in the LVH current account it would earn £67 after a year at 3.25 per cent, albeit if the rate stays the same.
Kilu didn't rule out the possibility of launching Isas in the future. But as it's next step LHV's will look to launch overdrafts and linked easy-access accounts, which will arrive within a few months.
The current account is designed to be intuitive and self-service so new customers can open and use the account quickly. Customers will receive a debit card and can use google pay, with Apple pay expected to launch soon.
Kilu said: 'If we develop anything then it should be easy to use for the customers so they don't need any handholding.
But with said, should new customers require help with banking queries LHV has customer service help via email currently and there is a dedicated customer service team based in the UK.
'If customer numbers grow, then of course we need to keep an eye on customer support', says Kilu. But he is coy about the number of customers LHV anticipates it will attract in its first year.
'We are a bank for savers, not for spenders. If you want a good interest rate and to start saving with small amounts then LHV should be the first choice.'
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