Deposit platforms such as the German “WeltSparen” and “Zinspilot” are among the most important innovations in banking: Customers get more choice and can benefit from higher interest rates from other banks. Deposit-taking banks efficiently diversify the sources of their customer liquidity, which contributes significantly to the fulfillment of regulatory requirements and the stability of the financial market. House banks, in turn, can deduct deposits from their balance sheet by brokering third-party products via the platforms, effectively reducing their negative interest burden at the European Central Bank (ECB) and at the same time strengthening their customer offerings. In this way, deposit platforms help create a more resilient and customer-friendly financial system. With this argument, Dr. Tamaz Georgadze introduces the topic of his comment in the Börsen-Zeitung on September 2, 2021.
Around 400 financial institutions in Europe are cooperating with Raisin DS that recently emerged from the merger of Deposit Solutions and Raisin. These include well-known institutions such as Deutsche Bank or Commerzbank, the largest savings banks and cooperative banks, established foreign financial service providers such as Aviva, Investec or Crédit Agricole Consumer Finance, and neobanks such as N26.
“However,” writes Dr. Tamaz Georgadze, “the wider public may have recently become aware of the deposit platforms through another issue. One of the 400 partners, Greensill Bank AG, based in Bremen, had to file for bankruptcy in March 2021 – an unfortunate event for all market participants, especially the municipalities, whose deposits at the bank were not secured. Since then, the discussion has been simmering about who is responsible. How did the bank’s good rating come about?”
Following the scandal, the role of deposit platforms was also discussed, reports Dr. Tamaz Georgadze, and focuses on three questions.
- First: Does the compensation of customers who have deposited money with Greensill Bank via deposit platforms put a burden on the deposit protection fund of the banks or even on the taxpayer?
The average amount that customers invested with the bank via platforms was around 40,000 euros, well below the limit of the statutory deposit protection and thus fell within the scope of the Compensation Scheme of German Banks (EdB). “This deposit protection fund is filled by the banks, tax money is not involved”, says Dr. Tamaz Georgadze.
As his information shows, practically all deposits fall – on average – under the deposit insurance, so that the risks are usually socialized. But on a platform like this in particular, risk is the decisive factor that can make all the difference. If there is no difference in risk, the investor’s selection process no longer makes sense. The rational investor puts his money where he can expect the highest return. But it is precisely the more or less well-known names that may induce savers in doubt to invest their money in the bank that they have heard of before and that they trust.
“Once your Raisin Account is open, you will be able to choose savings accounts from all over Europe. All the important information you’ll need to know, such as the bank, interest rates or length term, are set out clearly so you can make easy comparisons.” So it says on their website raisin.com/quick-start. However, once all the risks have been leveled, this selection process no longer makes any sense and is, in economic terms, a waste of the investor’s valuable time. A machine that finds the highest interest rate and the appropriate time period is easier to construct.
“When you’ve chosen the savings account that’s right for you, let us know by logging in to your Raisin Account and selecting the savings account you want to open. You can apply to open as many accounts as you like.” The platform makes it as easy as possible for investors to open accounts and transfer money.
The investor is offered the experience of a selection process that actually has no economic function, because the most important topic, namely risk, cannot be meaningfully incorporated into his calculation. This leaves him with the more or less irrational choice between different colors and shapes of logos. Clicking on the alternative with the highest interest could be done by a robot.
What about the second question of Dr. Tamaz Georgadze:
- Second, is it legitimate for savers (and platform operators) to rely on deposit insurance – or should certain market participants be wholly or partially excluded from deposit insurance or be less protected?
“The aim of deposit insurance is to strengthen financial market stability and prevent bank runs. At the same time, it protects customers from risks when using simple savings products that they cannot assess themselves. It is therefore impossible for consumers to carry out a credit risk assessment or even assess the stability of the bank when opening a bank account”, says Dr. Tamaz Georgadze. Here he ignores an important EU-regulated industry, namely that of credit rating agencies. Knowledgeable in reading and writing, investors can be expected to understand the risk classifications given by rating agencies in the form of school grades: AAA, AA, A, BBB, …
“In a deposit insurance case, on the other hand, the principle of equal treatment must apply to all customers, regardless of which channel they used to access the bank’s products. In view of the increasing variety of access channels – branches, direct portals, comparison websites, interest rate platforms and many more – it would not be reasonable to expect consumers to judge for themselves at any time whether they are using a fully or partially protected channel when using identical banking products”, says Dr. Tamaz Georgadze.
- Third: Would the platform operator have had to recognize the problems of Greensill Bank and have had to actively exclude the bank from brokering deposits before the financial supervisory authority BaFin passed the payment moratorium?
“To do this,” says Dr. Tamaz Georgadze, “one has to consider the different roles of the market participants. In the case of bank deposits, the sole authorization and monitoring function rightly rests with the banking supervisory authority and, to a lesser extent, with the auditing association, which has the tools and information necessary to carry out this task. No private company should decide and judge which regulated financial institution should get better access to customers after admission to the deposit business and which should not.”
Platforms that provide consumers with an apparent choice of identical banking products have hardly any beneficial economic functions. From an economic point of view, the most efficient allocation of the resource “capital” is important. In a market economy, the preferences of market participants are reflected in the prices they are willing to pay or are willing to accept. With every lending of money, it comes down to the risk, because after all it is about the uncertain future for all people. However, consumers cannot be expected to form their own creditworthiness assessments about hundreds of banks. But the work that cannot be relieved of the saver is to reflect on one’s own willingness to take risks and to take this into account when making decisions.
The willingness of investors to take risks has been shown to vary. That is why there are methods and approaches for risk profiling of investors which make it possible to analyze the risk-bearing capacity and willingness to take risks according to scientific methods. These methods exist and need not be invented. As the statistical basis grows, a steady improvement in the approaches to risk profiling can also be expected.
There are also credit rating agencies that are under the supervision of the European Securities and Markets Authority (ESMA). The more than a century during success story of the rating agencies is based precisely on the fact that symbols that are understandable for everyone express the different levels of risk. It is therefore reasonable for investors to make their decisions on the basis of such ratings if they want to achieve particular advantages over their deposits at their account-holding bank on interest-rate platforms.
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The world’s savings cannot be faced by a world deposits insurance. It is up to the interest platforms themselves to live up to their self-chosen brand names such as “WeltSparen“. There is no such thing as a risk-free world of deposits in this world.