The new retail deposit marketplaces are here, and they are not messing around

It’s well-known that retail payments, accounting, e-commerce solutionsmerchant acquiring and retail lending are the most well-developed and quickly matured segments of the fintech industry, both regarding executed deals, the number of investments, and compound annual growth rate (see Tanaya Macheel’s post on fintech funding).

This should not be very surprising as there are still various low-hanging fruits ready to be grabbed by innovative new entrants.

We are still waiting for similar momentum to gather pace in coming years in multiple other parts of the financial services ecosystem, e.g. corporate finance, corporate payments, SME lending and asset finance, and insurance. It’s true that from the perspective of basic banking products and services, financing and credit have already been hit hard by the fintechs on all fronts by alternative finance solutions.

Payments, remittances, and transfers have also been hit hard by the new players, and you can spot new players in every front. The rise of fintech entrepreneurship is a global phenomenon, and at first, fintechs were mainly concentrated in the US and Europe. Now, the situation is very different as China and APAC region has risen to prominence.

What has been missing from the daily discussion around fintechs, though, is the apparent lack of deposits and savings innovations. Yes, there are promising new entrants in the retail banking and personal financial management space, but they focus on different things, e.g. digital-only or making onboarding less of fuzz. One thing that can be said for sure is that the financial service provided by the new players are different from the financial service we are used to, and this has been noted both by consumers as well as by investors.

However, something has changed in the financial services ecosystem, and now we can see that two significant trends are becoming more or less apparent. The so-called neobanks and challenger banks are popping out regularly throughout the globe from the United Kingdom and France, Italy to Finland, each challenging incumbents locally and regionally.

Which are the leading players in Europe?

At the moment, there are three quite well-known savingstech players in Europe. They are trying to come up with their own approach towards the new European retail deposit, and they all come – surprise surprise – from Germany (Berin, Hamburg & Münich). At the very basic level, all these savingstech companies share four key features (digital platforms, strong focus on product development, bringing different market players together and Europe-wide coverage) although their approaches differ. Personal financial management and wealthtech companies like Cashboard (Berlin, Germany) are also interested in deposits, but it’s not their primary focus.

Although these three companies are quite new, they have certainly proved that their business model is sustainable. Retail deposits have not been a fascinating product, and thanks to the ultra-low interest rates, retail savers have had basically two options to choose from, namely to keep at least some of their cash balances on their bank account with no real yield at all or to move into riskier asset classes. German savers seem to have understood that the new players like Raisin, Savedo and Deposit Solutions offer them a set of new options. The European deposit insurance scheme guarantees that all deposits up to 100 k€ are protected if the bank operates in the European Union member state.

Raisin, which is by far the most popular and largest retail deposit marketplace in Europe, is currently growing very fast. In April, it was told that it has exceeded 3 b€ (yes, three billion euros) of deposits, and this happened just four years after the company was founded. Raisin has over 75 000 clients, and the number of customers has been growing steadily (in January 2017 they announced that they had 60 000 European customers).

The growth actually comes from both factors: on the one hand side customers are continuing to invest more and more money as their experience with the platform grows. And additionally, new customers are signing up at a significant speed.

Katharina Lueth, Head of Europe, Raisin (Business Insider, 19.4.2017)

As I explained in my recent article on the European retail deposit market, European savers are desperately seeking to find new savings options and as they are either hard to find, difficult to understand, not available in their home country or not enough clear information about the options is available, new fintech-driven solutions are emerging to gap this valley of “ignorance” and create new ways for savers to access better rates Europe-wide. Raisin’s, as well as other players like it, are trying to answer the consumer demand (especially by the risk-adverse Germans who have, according to Handelsblatt, “complained of having no way to accumulate wealth and once-frugal companies gorged on the cheap money to refinance at lower costs and pile up lots of debt”)

Raisin’s, as well as Savedo’s and Deposit Solutions’, understand the challenge, and as fintech startups, they have a unique advantage over incumbents, i.e. they know that trust matters and that retails deposits are boring as watching paint dry. They have been able to convince the consumers of their value, and thanks to their partner ramp-up, savers have been confident that these service providers are reliable. Many people still might remember the ill-faith of high-interest Icelandic banks (Kaupthing, Landsbanki, Glitnir), Latvian banks, and Bulgarian banks but these unfortunate events do not seem to intimidate investors. Deposit insurance schemes appear to work at some level, and although there hasn’t been a system-wide test of the deposit insurance, local banking crises seem to be handled quite well.

There are multiple options available for consumers to easily compare different banking products head-by-head but taking action – getting the job done – has been much more challenging as opening deposit accounts generally requires you to visit the local branch, carry out tedious AML/KYC processes and making actual money transfers. Raisin and other savingstech companies rely strongly on the platformization of the marketplace (the product range is huge), and active collaboration (partnerships with incumbents) with multiple counterparties. Some of the companies, most notably Savedo, are currently investing heavily in product innovation and enlarging their product offering from plain vanilla term-deposits into new product ranges.

Why Europe? Why now?

The emergence of European savingstech doesn’t come as a surprise (deposits make up a substantial part of the total financial assets of EU-28 countries), and the growth of various investment platforms is an important trend due to regulatory changes (i.e. banks need to have stable funding sources) and the lack of deposit transmission mechanism. [1] As explained before, there are multiple value drivers and supply/demand-side factors contributing to this. The fragmentation of the banking market in Europe, regulatory harmonization (especially AML/CTF and KYC procedures) and European deposit interest rate divergence create attraction towards arbitrage. Creative entrepreneurs, with appropriate experience from the financial services industry and emerging technologies, have been able to capture the opportunity and create a new kind of marketplace.

For example in Finland, Finance Finland (ex-Federation of Finnish Financial Services FFI) just published some results of their 2017 national savings and investing survey. The figure is unfortunately in Finnish, but the most striking part is the total amount of people who still save to savings and bank accounts (total is 39%). The number of individuals, who invest in mutual funds and equities, has been steadily rising at the aggregate level (from 15% in 2012 to 29% in 2017).

For example in Sweden, where competition has increased (average fund fees are also much more lower than in Finland), the product range is much more diverse, and households have more wealth, people actively save and invest into mutual funds, equities and insurance and pension products much more often than in Finland. The amount of mutual funds investments and continuous active monthly investing in Sweden is remarkable compared to Finland.

As many fintechs, savingstech are highly dependent on the pre-existing banking industry and their processes and infrastructure. With the wealth of experience the incumbents have, it’s remarkable that there hasn’t really been notable signs of price competition, product innovation, differentiated marketing, or some combination of these.

OP Financial Group's savings account product. Copyright OP Financial Group

Group Return Account. A screenshot from the video created by OP Financial Group. [*]

OP Financial Group Plc, the leading financial group in Finland, launched an unusual deposit product called Ryhmätuottotili (“Group return account”) back in 2013 but for some reason, it’s not available anymore. In this video (in Finnish), OP’s Business Management Specialist Manager Noora Heikkinen-Virtanen clearly explains the basics of this time deposit product. Ms. Heikkinen Virtanen calls it as a “communal account product” that has two core features: (a) participation time (before the final interest rate is set) and (b) pooling (more participants and money there is, the higher is the interest payment). Ryhmätuottotili is a good example of the fact that incumbents are following the market conditions and with new deposit products.

Ryhmätuottotili is a good illustration of the fact that incumbents are actively tracking also the more traditional retail deposit markets. Banks try to alleviate both revenue and expense pressures as well as respond to pressures created by evolving technology and client needs by introducing new products. It’s a no-brainer that if there are two, otherwise exactly identical deposit products but the rate of the first is 0,05% p.a. and the other’s 1,00% p.a., a saver will most probably choose the product with 1,00% return rather than the one with 0,05% interest rate. If retail banks are unable to respond, savers will either choose riskier products and/or they’ll leave to a more suitable competitor for better offering (or at worst they do nothing). Raisin, Savedo, and ZINSPILOT (Deposit Solution’s retail brand) have already proved that they have discovered a sustainable business model that is further strengthened by their strong partnerships, low-cost channels, and underserved clients. By the way, also Finnish savers are knowledgeable of these new services.

Euro-denominated deposits held by Finnish households with Finnish MFIs, deposit stock and average interest rate. Copyright Bank of Finland.

Euro-denominated deposits held by Finnish households with Finnish MFIs, deposit stock and average interest rate. [Bank of Finland]

Stock of deposits with Finnish deposit banks by interest rate linkage. Copyright Bank of Finland.

Stock of deposits with Finnish deposit banks by interest rate linkage. [Bank of Finland]

Conclusions: The variety of retail deposits products and the rise of pan-European deposit marketplace

It’s widely acknowledged that the current ultra-low interest rate environment hurts savers unevenly throughout the globe, and in Europe, some savers face even negative interest rates. [2] The world has always been full of interest rate convergence (and deposits in foreign currencies have been available for a long time) but especially now savers are looking for more profitable savings opportunities, and as European banks, in general, have been able to fund themselves through alternative funding channels, deposit rates are at historical lows.

The part of the secret sauce of Raisin, Savedo and Deposit Solutions is the fact how they have managed to combine functional and economic value in a very creative way at the very beginning of their journeys. They gather deposit offers from multiple partners banks and provide a simple, convenient way to carry out the whole onboarding process from the account opening formalities to finding out the most attractive deposit products. The offering is not exclusively limited to the eurozone, but there are also other European banks available, so it’s easy to compare offering between different banks across Europe.

Although these players might not actually offer you the maximally best interest, i.e. you have a good personal relationship with your bank, and that gives you some form of leverage when negotiating the deal, the offering is much better than in general. More banks and deposit products there are available through these platforms (and just think about the possible effects of PSD2 in this context), more competition there is between the banks. As these savings and investment platforms move forward, there will be new kind of partnerships enabled by technology that standardizes troublesome processes between the platforms and their respective partners.

Secondly, most of these new savingstech players are operating digital-only. As we know, it’s actually quite hard to open even a regular current account at a foreign bank. Just think about the fact that if you move to another EU country, they require you to submit a bunch of papers and many times it might sound like they don’t even know what they should be asking for. In the case of Raisin, where I have opened an account, the process was itself convenient and understandable, i.e. this information is what you need, and these are the documents they assume you to submit. Raisin, Savedo, and Zinspilot are clever in the way they approach this problem as they haven’t taken the status quo as granted; instead, they have been able to digitize the onboarding process and make it much more convenient than it regularly is. Raisin has collaborated with yet another German startup, namely IDnow to facilitate conversion and customer identification, since 2015. [2] The main advantage of these digital investment platforms over traditional brick-and-mortar service providers is the fact that the client doesn’t need to submit all the same documentation over and over again to several banks in person, and besides, offers are digitally available 24/7/365. Although savings products

Although savings products might not be the primary asset class of your choosing, they are considered as one of the core building blocks of an investment portfolio. Even though interest rates are low at present, a term deposit or other kind of deposit product might offer some guaranteed income for a saver or investor who is risk-averse.

It remains to be seen if incumbents are able to see the opportunities posed by the core industry trends. The ongoing change regarding the competitive landscape (esp. new business models), technology trends, regulation, and consumer behavior will require traditional banks to re-envision the way deposits are offered. As more and more of us demand more transparency, openness, and control from our banks, banks need to respond by adopting a new customer-centric mindset and focus more on providing digital deposit solutions that will streamline end-to-end operations. Whether you think Raisin and the other savingstech companies are substitutes for traditional bank relationships or not, their operating model seems to be much more in-tune with the emerging realities of our time (and even some of the clients would like to concentrate all their banking services to only one provider, there are a lot of those who hunt for the best deals available)

[1Rising European Bank Deposits Wind Up at ECB as Lending Sputters (2017, Mar 7). In Bloomberg Markets. Retrieved Jun 12, 2017, from Bloomberg.

[2Savers could revolt over low interest rates, says William Hague (2016, Oct 18). In The Guardian Economics. Retrieved Jun 9, 2017, from The GuardianLow Interest Rates Hurt Savers (2016, Sep 30). Retrieved Jun 9, 2017, from Efficient Wealth Management; How the ECB Hurts Europe’s Savers (2016, Feb 2). In Opinion/Commentary. Retrieved Jun 9, 2018, from The Wall Street Journal; How low can they go? Savers in trouble as deposit rates fall (2017, Apr 4). In Personal Finance. Retrieved Jun 9, 2017, from The Irish TimesIt’s a Bad Time to Be a Saver in Europe (2014, Nov 7). In Bloomberg View. Retrieved Jun 9, 2017, from Bloomberg.

[2] For a more exhaustive explanation of the authentication solution, see “Benutzerhilfe: Video Identifizierung mittels Smartphone. Durchgeführt und bereitgestellt von IDnow” (in German)

Photo credit: Alexas Fotos via / CC0

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