Deposit strategy an opportunity to challenge traditional players

Updated: Sep 28

The coronavirus (COVID-19) pandemic led to the accumulation of a large stock of household savings across advanced economies, significantly above what has historically been observed.

In ordinary times, Europeans save around 12 percent of their income. But as families stayed at home and furlough schemes supported income during the pandemic, this savings rate increased sharply. European families saved almost 19% of their income during 2020 and 2021.

The IMF estimates that European households saved nearly 1 trillion euros more than they would have had, if the pandemic had not happened. However, these savings may not be released back into the economy as expected; the uncertainty of Omicron means households may hold onto their savings for longer.

Similarly, in the USA during the start of the pandemic, Americans' cash cushions grew as they hunkered down, sheltered in place and stopped spending money on dining out, travel and more. They also benefited from three rounds of stimulus checks, extra unemployment aid and Child Tax Credit payments.

At their peak in December 2021, Americans' excess savings totaled $4.2 trillion, according to The FED (Federal Reserve) data. The biggest portion of that increase came in the form of checking-account deposits and physical cash, which soared to $3.9 trillion from about $1 trillion. The rest of the extra liquidity is in the form of time deposits and short-term investments.

While, the FED and the ECB (European Central Bank) in an effort to combat rising inflation have recently raised interest rates, disrupting a recovery period marked by record low interest rates.

The rise in interest rate could see challenger banks and fintechs starting to attract new customers with enticing high-interest savings offerings.

Even though traditional banks are expected to raise their rates slower than the FED or the CEB, smaller banks and savings institutions both across Europe and the USA are facing a real threat from Challenger banks and deposit-taking FinTechs. Untethered by traditional balance sheets, Challenger banks are able to move faster anticipating interest rate rises as a way to stay competitive.

Attracting new users is one thing, but giving them an experience that builds confidence and trust helps these new users see your institution as a partner for long-term financial health. Becoming the trusted hub for someone’s financial journey means more cross-sell opportunities, as it gives more chances to be there when individuals are ready to tackle big life moments, like buying a new car or first home.

Continued innovation and improved digital experiences are the key strengths of Challenger banks and deposit-taking FinTechs, we discuss it in detail below.

FinTechs are now trusted partners, while savings are critical source for their funding.

In recent years, countless neo-banks have appeared, displaying attractive services, a multitude of features and user-friendly interfaces, with the ambition of allowing everything to be done in a few clicks. All with less costs than traditional banks. But these new kinds of banks, due to their status as simple payment institutions, are limited in terms of investment solutions, and this is where other Fintech players come in.

These Fintechs offer attractive and economical solutions for delegating the management of savings, and even if they only have a few years of existence, they already manage several hundreds of millions of euros in outstandings.

To organise their financial savings, the majority of savers rely on traditional banks. Generally, the preferred savings account is life insurance, and this for a simple reason : it benefits from significant tax advantages and offers a multitude of advantages. Fintechs also rely on this savings product, which makes it possible to diversify the capital of savers according to their profile.

Savings are once again being recognised as a critical source of funding. Overall, the period of the pandemic has presented operational challenges to savings providers, with sudden requirements for greater levels of funding, even if temporary, and greater degrees of volatility in customer activity. In ways reminiscent of the 2007/8 financial crisis, during the early stages of the pandemic some non-bank lenders suddenly lost access to wholesale funding and securitisation markets, albeit temporarily. For those who were impacted, this served as an uncomfortable reminder of the value of retail savings as a source of funding.

Customers are experiencing simple and great customer experiences.

The expectation for digital solutions increased exponentially. Even before the pandemic the expectations for digital solutions were rising, with the growth of services such as Amazon and Netflix. The use of cash was already in decline, with digital forms of payment increasing in popularity, and within the banking sector we saw the emergence of new, app-based digital banks such as Monzo and Starling.

The pandemic only accelerated this shift into digital channels, with customers now expecting simple, great experiences, all the time. This shift is clearly visible in the increased number of downloads and the overall improvement of banking apps scores for both traditional and digital players.

Overall, customers are now putting more focus on digital, health and sustainability trends, as was found by PwC in its “Global Consumer Insights Survey 2022”. The result: savings providers are now having to consider whether their own digital offerings are meeting the needs of savers, and whether they can be developed to not only remain relevant but to enable the further evolution of those services.

The pandemic has had a profound effect on savings providers. The disruption to the savings market caused by the changes highlighted above have not only required short-term agility to navigate; they’ll require savings providers to implement long-term change, accelerating their strategic roadmaps and in some cases considering fundamental changes to their operating models.

A competitive and innovative landscape in savings

The competitor landscape is becoming increasingly diversified and the choice of savings products available to customers is growing steadily.

A variety of new propositions have been launched, looking to address key customer savings needs in more innovative ways than incumbent providers.

Rather than rolling out another version of the same savings account with an interest rate variation, these challengers offer products that approach saving from a different angle and encourage people to change their attitudes and approaches to saving, rather than focus on rentability.

We identified three different types of segments to which savings products are targeted depending on the amount of wealth individuals have to save. In the chart below we take these segments and match it to the innovative saving features proposition offered by FinTech start-ups.

First we have “Mass Market” which refers to individuals with less than US$100,000 in cash and a household income lower than US$75,000 a year. Different innovation themes have emerged across the savings market for this population and it can be wrapped on five key themes:

  • Savings Goals & Pots : A Pot is a space in your account where you can separate out your money from your main balance to achieve your saving goals.

  • Automation : is an automated process to move a set amount of money from one account to another on a regular basis.

  • Saving challenges (Gamification) : means adding game mechanics, elements, and experiences to a non-game product to make it more appealing, engaging, and fun.

  • Marketplaces : are online platforms that enable providers to offer a more diverse set of products by partnering with other companies, FinTechs and third parties.

  • Money Saving propositions : FinTechs are adding diverse saving tools to their propositions that allow users to stream their income.

Then we have those individuals in the so-called “affluent segment”, which refers to individuals with US$100,000 to US$1,000,000 of liquid financial assets plus an annual household income over US$75,000. Differentiated saving products are part of the banking proposition.Players in this space do tend to offer higher than average interest rates to attract funds, while most of the features and identified trends for the mass market segment apply as well for the affluent segment, with some additional variations.

And finally we can identify High-Net-Worth Individuals (HNWI), which are individuals with over a US$1m to keep in cash, usually Private Banks will sit down with the client and tailor accounts very much depending on their client’s needs. It is part of the overall wealth proposition and in savings it could be the type of account, the notice period and whether it should be in Euros, dollars, sterling, or any other currency.

An example on Private Banking players strategy, includes UBS, who just recently scrapped its planned $1.4bn purchase of Wealthfront on 2 September, in a setback to the Swiss bank’s plans to grow in the US in online wealth advice.

The intention to acquire Wealthfront was to deliver digital wealth management offering to millenial and Gen Z affluent investors, accelerate its growth ambitions in the US, broaden the firm’s reach among affluent investors and expand its distribution and capabilities.

California-based Wealthfront at the time said it had about $27bn under management for around 470,000 clients. UBS overall manages around $2.8tn in assets, mainly via thousands of advisers and relationship managers across the world.

UBS and Wealthfront said they made the decision together but didn’t give any reason. The companies said UBS instead will invest $69.7m into notes that can be converted into Wealthfront shares, at the same $1.4bn valuation as the deal they announced in January.

Microsavings targets small budgets

Microsavings services are based on the idea of new and small savers accumulating savings in very small amounts which are qualified as microscopic increments. Because the money is accumulated at a microscopic level, the saver is able to acquire savings without making any radical sacrifices. It is an excellent way for a non-saver to become a saver and is well suited to the new-saver market niche.

Microsavings accounts typically have no minimum initial deposit or funding requirements. There are often no or incredibly low account fees. The idea is to give the new or small saver every opportunity to accumulate a more substantial amount of savings. Traditional obstacles to that effort are therefore removed.

Microsavings services are based on the use of different passive savings strategies. They work by allocating a very small amount of money to savings or investments based on regular financial transactions. The specific transfer methods vary by service and are surprisingly innovative.

For example, Revolut uses a method referred to as round-ups. When you spend money with your credit or debit card, the amount of the purchase is rounded up, with the difference going into savings.

Qapital also uses the round-up method of allocating change to savings. But they take it a step further by allowing you to allocate small savings deposits from other activities, like social media participation. For example, you can allocate a few cents to be deposited every time you “like” a video on YouTube or a post on Facebook.

In each case, you transfer money automatically into savings as a result of ordinary financial transactions or other activities. But the number of transactions means multiple micro transfers occur, adding up to more substantial amounts on a weekly, monthly, or annual basis. More importantly, you are able to accumulate savings without making any kind of a dedicated effort to do so.

Robo Advisor for automated portfolios management

Whereas microsavings services focus on creating systematic methods for new and small savers to accumulate savings, robo advisors serve as professional investment managers for new and small investors. These types of advisory services allow small investors to invest with little money. They also charge lower fees than traditional investment advisors do.

Basically, robo advisors are online wealth management platforms that offer automated portfolio management, primarily for small investors. The methodology is based on algorithms designed by each robo advisor platform.

They typically have very low minimum initial deposit requirements. Fees are based on a percentage of your account balance and can run between 0.15% and 0.50% per year. That's well below the 1.00% or higher that's typically charged by traditional investment advisory firms.

They start by doing an assessment of the user's robo investing profile by evaluating users age, goals, and their risk tolerance. From there, they will construct a portfolio of stocks, bonds, and sometimes real estate that is consistent with that profile. They typically invest using low-cost, index-based exchange-traded funds (ETFs) to keep investing costs low.

Most also offer regular portfolio rebalancing to make sure the account stays consistent with the target asset allocation. Some even offer tax-loss harvesting, which is designed to minimise the tax liability that can be generated by short-term capital gains.

User’s only responsibility is to fund their account — the robo advisor takes care of all of the mechanics of the investment process and at a very low fee.

New investment platforms — a way of actively supporting green projects

On the one hand, according to GSIA (Global Sustainable Investment Alliance), SRI assets represented $30tn in 2018 — a 34% increase in two years, and $35tn in 2020. It means that over a third of all professionally managed investments in North America, Japan, Australasia, and Europe are now targeting social or environmental goals. On the other hand, according to a 2017 study from Morgan Stanley, Millenials are twice as likely to invest in sustainable projects vs their older peers. Those two figures show the market potential of platforms that offer their users the opportunity to support green, sustainable and impactful projects.

The first generation of platforms, created before 2015, included crowdlending and crowdfunding for SMEs. Some were specialised in sustainability such as, a platform enabling individuals to invest in sustainable energy projects while others were more generalist: for instance, individuals going on Wiseed could invest in real estate as well as sustainable projects. works for more ethical finance, it offers to invest in companies with a social, societal or environmental vocation to give meaning to one's money online.

However, their risk-return ratio was not always sustainable for investors.

A new wave of investment platforms emerged over the last 5 years: they allow individuals to invest in various kinds of ESG products: stocks, pension funds, trees, or even private equity & VC funds focused on impact investing. However, the competition is getting fiercer on the global investment apps landscape. Indeed, the Berlin-based company Trade Republic just raised $900m in a Series C round in May 2021. This kind of player could possibly offer green investment alternatives in the future — and they might not be affected by the same brand image issue neo-banks would face.

Making ready for higher interest rates

With nearly 1 trillion euros more of savings in Europe and 4 trillion in the USA brought on by various stimulus and pandemic-related economic packages, most institutions may feel less of a need to grow deposits. When financial institutions are flush with deposits, lending becomes the focus.

However, with more people carefully watching their spending during these uncertain times, it also meant that consumer demand for loans has softened. It would be unwise to overlook the deposit cycle on the horizon. As higher interest rates return, so too does the incentive for people to switch banks in order to make the most of their savings.

Among the promises made by fintechs in the field of savings, new digital savings propositions are being developed and improved which attempt to get to the heart of why people want to save whilst also addressing the hurdles that are perhaps getting in the way of their saving as effectively as they could be. Alternative providers are challenging the customer mindset and offering products that bridge the gap between understanding how to save money and doing it in a sustainable way.

In order to navigate the changing landscape, it’s important to anticipate the possible threats that represent higher interest rates, and start looking for ways to take advantage of the emerging opportunities.

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