UK challenger banks have failed to break the big five bank's stranglehold on the UK's household deposits market, despite offering savers much higher levels of interest when compared to their larger rivals.

Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander hold £827bn of the £1.3trn in UK household deposits, equivalent to a market share of 63 per cent, despite paying significantly lower rates of interest on average.

Research by the Centre for Economics and Business Research on behalf of Flagstone revealed that, based on current instant access and fixed-term deposit rates, savers with the big five banks could earn a maximum of £3.4 billion in interest on their cash savings over the next 12 months.

However, analysis of the best-paying instant access and fixed-term deposit accounts showed savers could earn up to £7bn extra interest if they switched from the big five to a leading rate offered by a smaller provider.

For example, out of the big five, Santander currently pays the highest rate of interest on an instant saver, at 0.4 per cent. By comparison, Virgin Money pays 1.5 per cent on its e-saver easy access account, according to Savingschampion.co.uk.

The same trend occurs across other types of savings products. Barclays pays 1.2 per cent on its two-year fixed-term bond, the highest level of interest among the big five. However, this is much lower than the 2.3 per cent Atom Bank offers savers.

A 4,207-person survey carried out by YouGov on behalf of Flagstone found more than four in 10 savers would be tempted to switch accounts if offered an extra one percentage point on their savings.

Nearly a quarter (24 per cent) of those surveyed said banks would need to offer them an additional two percentage points in interest to persuade them to switch deals.

Among respondents with cash deposits in excess of £100,000, 57 per cent stated that a lack of a large enough interest rate differential between their existing and alternative accounts had discouraged them from switching accounts, compared to 44 per cent of individuals with less than £100,000.

Andrew Thatcher, co-founder and co-managing partner of Flagstone, said that despite challenger banks offering significantly higher rates than the High Street banks, switching is not occurring at a fundamental level, which indicates that other factors such as access to information and ease of transacting and managing deposit accounts still have a significant impact.

“In the advised market, which accounts for nearly 70 per cent of all UK household cash deposits, we’ve found that customers are even more inert,” he explained. “They are driven less by price and more by convenience, they are also strongly put-off by complicated or convoluted application processes despite having significantly more to gain.”

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