With skyrocketing savings all over the world, an economic crisis is difficult to avoid as consumption drops and investments are generally postponed.
While at first sight these unused savings seem to be a jackpot for banks in terms of increasing net interest income (= difference between credit interest payable, and debit interests receivable & linked investment returns), this is rarely the case. Profits
on savings have dropped due to increasing capital buffers banks need to guarantee and the difficulties banks experience to invest in safe and profitable assets. And holding large savings does not necessarily create a strong customer relationship (meaning the
retention risk is high).
We believe banks can activate these savings in 3 ways:
- By better educating their customers: saving money today is actually losing money on the long-term, as interest rates on saving accounts are lower than the inflation rate, resulting in a net loss of buying power in the long run
- By making investing more accessible, i.e. more user-friendly, more accessible to the layman, cheaper and more automated
- By providing more flexible, cheaper and faster financial cushions in the form of credits, so that customers don’t need to provision such a cushion themselves in the form of highly liquid saving accounts
Let’s explore these 3 methods for activating savings in a bit more detail.
Method of educating the customer
For many bank customers the concept of inflation is hard to grasp and not always tangible. Using the data collected by PFM tools, a bank can easily simulate how the monthly expenses of a customer will look like in 5 years, in 10 years, etc. This makes it
more tangible for the customer to understand as it is contextualized to their own personal situation. Afterwards the impact on their savings can be explained. This can be visualized by using real financial data of the customer, for example their weekly supermarket
spending. A customer with 15,000 EUR in savings and a weekly 150 EUR supermarket bill, can fill their shopping cart 100 times. However, at an inflation rate of 1% and an average interest rate on a saving account of 0.2%, this means that in 10 years the customer
can only fill ~92 shopping carts. By clearly visualizing this (for example by showing logos of shopping carts), the customer gets a better feeling of the impact of inflation and saving on their personal situation.
We believe there is a huge potential for simulators that combine interest and inflation calculations in an easy and understandable way. Linked to this, new tools can be offered to compare different banking products (credit & investment products), simulating
the impact of inflation for these, and allowing to make better informed decisions.
Method of making investing more accessible
Over the last years banks have put a lot of efforts into this, with robo-advise, automatic investment plans, automatic investing of expense roundups or spare change, capital guaranteed funds, etc. Although all these initiatives are excellent steps towards
promoting investments, all these tools are very directive and opinionated, i.e. the bank is taking over the investing from the customer and not always showing all investment choices.
We believe there is still a large opportunity for tools where the customer stays in full control of every investment decision and where the complexity of investing is not hidden away but strongly facilitated by user-friendly wizards and tooling. A number of
accessible techniques can then help the investor to maximally mitigate the market risk in a very simple and transparent way.
Method of creating financial safety cushions
A good market practice is to recommend customers to keep between 3 to 6 months of typical monthly expenses (with a minimum of 10,000 EUR) in a highly liquid form (such as a saving account). For many people however this would mean that all their savings need
to be put in a saving account.
One could argue that it is unproductive that all banking customers have to provision themselves such safety cushions, while the average period such cushions remain unused might be months or even years. Instead banks should provide alternative solutions for
this short-term liquidity cushion, so that customers can plan their financing towards the medium- to long-term. If banks can provide flexible and cheap ways to bridge temporary liquidity issues, this safety cushion can be invested in more long-term and more
profitable (while still secure) assets.
Here we mention two (new) financial instruments that exactly offer this flexibility, i.e.:
- LABL (Liquid Asset Based Lending), which provides a flexible and cheap way to lend money with your medium- to long-term investments as collateral. This type of product gives an excellent tool for customers to invest in the long-term, while still
having a cheap, flexible and fully liquid safety cushion for the short-term (offered by the bank in the form of a Lombard credit).
- FLEX (Financial Life Event Xeduler), which provides a long-term financial product combining a long-term investment and a long-term credit product. Idea is to balance out the short- to medium-term budget fluctuations in a highly flexible way, while
achieving an equilibrium on the long-term. Via this product, customers again have easy and cheap access to short-term funding, while they can focus more on their medium- to long-term financial plans.
Additionally in order for banks to keep this short-term funding cheap, banks can request additional collaterals from the customer (like in the case of the above LABL product), but can also work with rule-based money, i.e. the received money is deposited
by the bank on a specific account, which is not accessible by the customer, but instead automatically reimburses expenses occurring on the customer’s current account of a specific type (specific sector, location, specific merchant, etc.). This way banks can
impose that the money is spent for a specific purpose, which also reduces the credit risk (thus allowing to reduce pricing).
The above ideas demonstrate that banks can be very innovative when it comes to activating savings and that this activation can provide strong opportunities for banks to increase their revenues (from interest income to commission income) and improve
the long-term customer relationship.
We’re happy to further discuss this type of innovation, which we believe is just the tip of the iceberg.