Banks are paying too much for savings interest rates. Against the backdrop of low interest rates and relatively high inflation this statement certainly does not reflect the public sentiment, yet according to strategic consulting firm Roland Berger Strategy Consultants, banks should indeed consider to downwards adjust their interest policy.
As a result of the financial crisis, saving has become increasingly important to consumers. Traditionally, the average EU household saves about 11% of its disposable income. Yet the crisis has changed financial behaviour drastically, and households have, on a large-scale, exchanged risky products, such as shares or bonds for safe deposits. As a result, the volume of deposits has grown by at least 30% since 2003, by 40% in the Netherlands and by even more than 100% in Sweden. Roland Berger estimates that European households momentarily own €8.5 trillion in deposits, one-third of their financial resources.
The problem with deposits for households is the low return it provides. In some countries the low nominal return, combined with the rate of inflation, even provides negative real returns. A comparison:
The dominant thinking in the market is that banks are purposely providing (too) low interest rates. However, from a banks perspective this can be questioned. Up to 2009, using savings to finance investments was considerably cheaper than using funds at the interbank lending rate. However, nowadays the opposite is true. From 2009 onwards, the interbank rate has, on average, been lower than the interest rate offered to customers, implying that banks, from a financial viewpoint, have been ‘overpaying’ households. The extent to which this is done varies from country to country.
Banks have one key reason why they overpay: they don’t want to lose customers. Banks are also prepared to pay more because of “their stability and better position under the new Basel 3-standards applicable to the sector. These requirements oblige banks to, inter alia, for the money they lend out, possess sufficient savings”, says Mark de Jonge, partner at Roland Berger in the Netherlands.
The advice from the consultants is clear: “If interest rates remain low for an extended period – and most analysts predict no major change before 2015 – banks will find themselves under pressure to stop overpaying on deposits.” This will have to be done in a careful manner, says Roland Berger. A deposit strategy should be developed, that looks at the savings behaviour of customers and the deposit-elasticity. It is also advised, to accompany such discounts with mitigating initiatives, such as innovative ways to reward client loyalty, the introduction of new loyalty schemes and customized services, such as tailored pricing.