Fintech Trends: Savings

By Aleksandra Kireeva | June 1st, 2016
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  • Saving excessive amount of goods for future use was a normal human behavior long before money was introduced into the economy as a ‘universal good’. However, money savings offer the option that few natural goods possess: growth through time. In previous centuries, one could even make a living with interest income only – assuming there was enough in the bank account. Currently though, the returns on savings sometimes even fail to beat the inflation rate.

    It is no secret that income has direct correlation with the risks attached to it, including the savings. Furthermore, risks apply not only to the characteristics of a certain bank but also to the system, which is represented by the political and economic situations of a bank’s country of operations. Therefore, there is no surprise that the more reliable a financial institution is, the lower deposit rates it offers for the funds security. The same goes for countries, with EU members being in the leadership position.

    However, Germany tends to be overly conservative even on this account. According to the European Central Bank, in 2015 deposit rates in Germany were only 0,1%, at the very bottom compared to other European countries as well as EU-average. Experts point out that the highly consolidated German banking industry partially stands for low margins and profitability. Surprisingly, the account holders within Germany seemed to be totally fine with that, until fairly recent trends towards opening savings opportunities in other countries for them.

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    Earning on savings

    With a new business model emerging, citizens of the EU-members with more conservative approach can diversify their savings across various geographies. There is the entire pool of banks to choose from: for example, in France where average deposit rates are around 2% or in Italy, with 1.6%. The best part is that one does not even have to leave home to relocate his or her extra funds across the border.

    Assuming the differences between the deposit rates, it is a win-win situation: the individual starts receiving significantly higher income on savings, while a middle-sized bank somewhere in Portugal or Czech Republic gets access to a much wider pool of customers, usually with bigger disposable budget on average than in the home country. Such banks, especially from Eastern European countries, are relatively new and modest-sized members of EU banking sector, so, in addition, more deposits help them to finance more clients within the home economy.

    FinLeap is already exploiting this trend with its venture Savedo, which assists clients from Germany and Austria with finding more attractive saving solutions in EU. The network of banks, which Savedo collaborates with, include Portuguese, Croatian, Czech and German financial institutions. The model is also distributed among several others fintech companies in the country, who see the obvious advantages of such platforms.

    Risks and Security

    Assuring clients of the security of the deposit accounts is by all means a very important feature of fintech companies providing savings-related operations, especially with cross-border cooperation with different banks. Risk assessment is one of the first questions raised by potential clients, who do not always view less developed countries, despite them being EU-members, as totally trustworthy. Thus, proving that the savings are as safe in a Spanish partner bank as they would be in a leader German one is a vital part of such fintech platforms.

    First, European banks have strengthened their positions since the recent crisis, while the strict reserve and capital requirements made them even more cautious . The European Central Bank consistently introduced recovery policies aimed at stabilizing the sector and increasing the transparency of the banks reporting. Therefore, overall safety of the banking sector has risen significantly to prevent similar disturbances from happening or to soften the blow should it still hit.

    Also, there is a Deposit Guarantee Scheme, which was put in place in 2014 by European Commission, to provide the customers with protection of their savings with the amount up to €100,000 per deposit in a single bank. It surely means the increased security of households’ savings covers the majority of the deposits currently located in banks. Moreover, DGS works EU-wide, regardless of the country of residence for both the client and the bank, so German customers can benefit from it while having an arrangement with Croatian or Portuguese institutions.

    On top of that, fintech saving platforms take extra care to choose partners within the banking sector. The quality of the banks still differs across Europe, so evaluation of the risk profile of the potential bank with which one collaborates is an important part of the relationship management process. At the further stages on engagement, the financial institutions, which support the fintech company itself, also conduct a profound examination of the bank's stability to maintain the portfolio’s high levels.

    Individuals from EU-countries with long-established and overly conservative banking sectors can certainly benefit from the diversity of the higher deposit rates from less discovered ones, who in turn obtain additional capital to finance the local businesses. Building on the European deposit guarantee scheme, and thus, ensuring bank clients’ savings return up to €100,000, platforms like Savedo are developing more connections in the dormant savings market, redistributing money flows, and preserving the culture of savings and stability across Europe.

    EY European Banking Barometer 2015

    Saving Disgrace: The variation in deposit rates in Europe is both puzzling and worrying

    Banking in Germany: Constructive Prospects against Many Odds

    The changing landscape of financial markets in Europe, the US and Japan

    Fragmentation in the European Retail Deposit Market and Implications for Loan Availability in European Member States

    Start-ups erode traditional bank activities

    Current developments in the German banking market

    The state of European banking industry 2014

    Deposit guarantee reform in Europe: A systemic perspective

    European Commission unveils scheme for EU deposit guarantees

    Savings accounts in Europe: A dormant market?

    Savings in times of lowest interest rates – savings culture at stake?

    Aleksandra Kireeva