Enhancing your fintech's proposition with a savings account
CPO Sameer Dubey explains how the right banking partner can enable fintechs and brands to embed savings accounts into their existing products and ecosystems.
If your parents were anything like mine, you often heard the saying “money doesn’t grow on trees” while growing up. It’s an important lesson to instil during childhood: money is not infinite, and must be earned and managed properly.
But as adults, it’s not useful to cling to the notion that money doesn’t grow at all. Experience and financial education teaches us that money can indeed grow—when managed and invested in a carefully-considered financial instrument.
One such instrument is a savings account.
What is a savings account?
A savings account is a type of bank account offered by a regulated deposit taking institution (usually a bank) that lets the holder earn interest on the money they keep in it.
Savings account holders grow the original sum of money deposited (“the principal”) at an agreed “interest rate”. Savings accounts are unusual in that they are low risk instruments that leverage the intrinsic interest rates in the economy (known as the base rate) to offer returns.
But there’s more than one type of savings account, and different types come with different levels of interest and flexibility. Instant or easy access savings accounts let you access your saved funds at any time without restrictions while earning a small amount of interest. Term deposit savings accounts allow you to earn higher interest, but you have to commit to locking your money away for a fixed period.
Depending on the saver's needs, savings accounts can be used to earn interest and grow wealth on an ongoing basis, or to fund a fixed goal such as buying a car or going on holiday.
The demand for savings accounts
With low-risk and predictable returns, it is not surprising that savings accounts are so sought-after. Other factors that contribute to this include:
- Savings accounts are easy to open. With most banks that offer easy access options, you can also carry out day-to-day transactions and withdraw your money when and how you choose to.
- Savings accounts are easy to understand. You do not need deep financial expertise or knowledge like you do for many other interest-bearing instruments.
- Regulators try to keep the risk of loss of funds in savings accounts minimal. Savings accounts are one of the most commonly used interest bearing instruments attracting millions of consumers with varying degrees of financial education. Deposit protection schemes, SM&CR and supervision are some of the methods regulators use to protect consumers, minimise loss of funds and in turn ensure the stability of the financial system.
The added advantage of regulatory protection
In the UK, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) work hard to ensure that money deposited in savings accounts are protected from factors both within and outside the control of the banks. Key aspects of the regulators’ role include:
- Stringent licensing process. Simply put, you need a licence to become a bank, and only then can you accept deposits from customers and pay them interest. The licensing process involves a detailed and thorough review of internal systems and controls, risk management practices, security measures, and liquidity and capital adequacy. The process is intentionally designed to be stringent, so that only the strongest and safest institutions can hold customer deposits.
- Performance supervision. Banks receive robust and involved scrutiny from the regulators on an ongoing basis. Each bank has supervisors who engage very closely with their board and executives. The regulators keep a close eye on the bank’s financial health via regular check-ins, formal reports, and continuous disclosures as required by regulation. All of this is done to anticipate and minimise risk to customers.
- Deposit protection scheme. This is probably the most reassuring feature of a savings account as it reduces the risk of losing money even if a bank becomes incapable of meeting its obligations to savers. This could be for a variety of reasons, the most likely being bankruptcy (yes, banks also go bankrupt!). In this scenario, the UK’s Financial Services Compensation Scheme (FSCS) returns up to £85,000 to each eligible depositor.
- Senior management accountability. Senior executives in banks hold personal responsibility for the proper running of the institution, under the Senior Managers and Certification Regime (SM&CR). In practice, this means if any loss on customer deposits that can be attributed to the institution’s negligence or wrongdoing, members of senior management can be held personally liable e.g. via sanctions or a fine. This brings the importance of good conduct and strong risk management into a sharper focus for the leadership team.
Now, let’s talk interest
Since we know that money doesn’t actually grow on trees, the interest paid to savers by banks has to come from somewhere, right? The other half of the equation is usually credit: banks are one of the few financial institutions who have permission to lend out the deposits they receive. The borrowers pay interest on the loans they take out, and some of this interest is passed on to the savers. The remaining interest becomes revenue for the bank, which is known as interest income.
Banks are also required to invest some of the funds received from savers with the central bank or in High Quality Liquid Assets (HQLA). This is a regulatory requirement that asks all banks to at all times hold enough HQLAs to cover their net cash outflows for 30 days. Interest on these assets are usually aligned with the central bank’s base rate. As with the money lent out, some of the interest is held back as interest income and the rest of the interest earned is passed on to savers.
Savings accounts—for everyone by everyone?
We’ve established that there is a demand for savings accounts. We also know that only licensed deposit-taking institutions can offer savings accounts and pay interest. In addition, deposit-taking institutions will at a minimum earn interest on the money from these accounts at the base rate set by the Bank of England.
So, how is this relevant for fintechs and financial services firms?
Customers are seeking better integrated financial experiences and choosing financial apps that provide cohesiveness and convenience. Like Apple, fintechs and financial services firms can offer savings accounts to their customers and further enrich the user experience. This is also an ideal strategy to acquire more customers in the current high interest rate environment and create an additional revenue stream.
To successfully offer these accounts, fintechs will have to integrate with a bank. They can then white-label the bank’s savings products and offer this directly to their customers in their apps.
Problem: An Electronic Money Institution (EMI) that offers payments services via digital wallets to its retail customers is seeing an increased demand for interest payments on the balances held in these wallets .
Solution: The EMI adds a savings pot to its app and offers customers a competitive interest rate on money held in that pot for a period of time. These pots are white-labelled versions of products like the Griffin savings account. The accounts are distributed via the EMIs platform under a tripartite arrangement between the customer, EMI and deposit taking institution. The customer is able to get interest on its money, EMI gets a portion of revenue as distributor margin and it ends up as a win-win-win proposition for all three parties.
Results: Customers of the EMI moved more funds to the digital wallets to save. Customer retention increased, transactions via the cards grew significantly and the EMI added another revenue stream to its business model by way of distributor margin.
So, savings accounts and interest for every participant in the financial system? Yes! Offered by every provider in the financial system? Possibly, with the right banking partnerships*
Only banks and approved deposit-taking institutions can pay interest. So, while a middleware BaaS player may be able to offer your customers an account via its integration with a bank, they will still have to rely on the bank to offer interest bearing savings accounts. This extra integration layer adds on the risks of little or no returns as the middleware BaaS player also gets a share of the interest income.
Direct partnerships with full stack Banking-as-a-Service (BaaS) players with a banking licence (like Griffin) will reduce the layers of integration and provide more value to both your customers and your business.
Ready to offer savings accounts to your customers? Learn more
* Only deposit taking institutions can offer interest on savings to customers. Providers who are not licensed as deposit taking institutions have to integrate and partner with a bank to offer savings products and interest.