Banks advised to tempt consumers into investing, not saving

Across Europe, consumers are saving more amid economic uncertainty. However, according to Roland Berger, money put away in a savings account is neither good for consumers nor the economy. Investments are a far better instrument of growth.

Roland Berger studied the Belgian banking market, using the data to highlight how savings rates have reached their highest point since the global financial crisis a decade ago. Back in 2009, the savings rate – the ratio of savings to disposable income – stood at 19%. By the end of this year, Roland Berger expects it to reach 20%, with the possibility of even reaching 25%.

The interim years have been highly promising from an economic perspective, with savings proportions declining steadily. Indeed, by 2019, the rate had reached 12%. According to Frederick Van Gysegem, a Principal at Roland Berger and a report co-author, several factors have brought the rate down over the last decade or so.

These include “persistently high consumer confidence, an increased ratio of labor income/total income and an increase in loans linked to low interest rates.” However, the Covid-19 crisis has ushered in exceptional circumstances for economies across Europe and the globe, and few can truly have confidence in the economy as it stands.

The instinct to save in this scenario is understandable, as people hedge their money against market fluctuations that are all but imminent. To top this off, the forced change in consumer behaviour under lockdown, and its persistence in the time to follow, has brought a natural reduction in spending rates. The result is that savings are through the roof.

Banks advised to save on savings offering

However, Roland Berger points out that a savings account could actually be a highly inefficient instrument to protecting money. An example is the period between 2014 and 2019 in Belgium, when inflation rose from 0.5% to nearly 1.5%, coinciding with a dip in interest on savings deposits – in some cases to the legal minimum of just over 0.1%.

The upshot of these trends was that consumers relying on a savings account actually saw a decline of their purchasing power during this period. Meanwhile, the authors highlight that those with investment portfolios have witnessed growth in their wealth over the same period. 

So savings accounts are not the most lucrative option for consumers at the moment. Incidentally, savings accounts are also the least profitable from a banking perspective. As a result, the current trend of growing savings has been far from comfortable for banks.

“Banks' traditional business model has long relied on the net interest margin (NIM), a measure of the difference between the interest income generated and the interest paid out to depositors. As interest rates have plummeted in Europe over the past decade, the banks' NIM has been under pressure,” explained Van Gysegem.

Investment accounts, meanwhile, rely on commissions, which gives banks protection from interest rates and a far bigger scope for profitability. Put in absolute terms, Roland Berger reports that converting savings to investments could boost revenues for Belgian banks alone by €2 billion each year, and take their return on equity (ROE) up by nearly 2%.

Consumers and banks aside, the economy as a whole would also benefit from breaking open savings accounts. Particularly in the face of a recession, rising savings rates will only serve to worsen the economic outlook, while moving this money into diversified investment portfolios will offer much needed capital for several involved parties.

According to Roland Berger, the path forward is clear – banks must lure consumers away from savings and into investments. Part of this process will be to help them overcome the hurdles traditionally faced when investing, such as uncertainty of where to invest, uncertainty of how to invest, or even reluctance to invest in general. Provided these hurdles are overcome, billions could be added for consumers, banks and the economy as a whole.