Banks’ accounts interest rates as a proxy of performance

4.2. Banks’ accounts interest rates as a proxy of performance

Banks across Europe provide a large savings accounts offer. Some banks in this thesis’ sample, just themselves, propose up to 10 different possibilities. Hence, this part of the analysis will try to describe the most common savings accounts and their pros and cons. Then, annual interest rates comparison in the case of the “classic” savings accounts will be done (appendices 13 and 14). Indeed, interest rates are here, a proxy of the deposits’ performance, and will complete the structural bank analysis realized above. Every time, the term “interest rate” is used, it refers to the nominal annual percentage rate. In the banking sector, a nominal interest rate is an interest rate before taking into account inflation and fees.

Support bank accounts are accounts that can be found only in sustainable banks. The characteristics of support bank are that it is a free savings account (no interest rate and no management fee). Also, it is commonly an account that has a defined lifetime. The customer also gets the opportunity to choose a cause that is dear to him. For instance, Merkur Cooperative bank offers support accounts that defend several ethical causes by investing in international organizations’ projects. Amnesty account, climate account, save the children’s account, nature account and WWF nature account are the causes, an individual can defend simply by putting its savings in Merkur Cooperative Bank. This is an easy way to support a cause dear to you, safely, in total transparency and without any effort. Support accounts like some “classic”

savings account do not provide interests. It is the case of Banca Etica, and they took the time to answer this question. This was their answer: “Our first value proposition is that we are the own Italian bank that is completely transparent. If you put your money in our savings account you are sure that we don't use them to finance companies or projects involved in arms, tobacco, fossil fuel, animal experimentation... On the other side, you are sure that your money will be

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invested in sustainable projects from an environmental and social perspective: culture, social cooperation, young entrepreneurs. So basically, a customer chooses us because he shares our values. We also offer fair prices. Our services are competitive compared to the other Italian banks and we also provide digital services. In the end, if you decide to buy some stocks and become a shareholder you will gain some extra discount on loans and other services.” Thus, some sustainable banks believe what would attract potential investors is more all the advantages they offer compared to systemic banks (transparency, ethical projects, possibility to choose a cause that is dear to you, etc.) than the few interests they could gain. Furthermore, this added to competitive services should be sufficient to convince customers. Indeed, savings accounts interest rates are anyway very low. Nowadays, when putting their money in savings accounts, most of the time, people do not expect the account to be very profitable. They often open it to

“store” their savings.

Some accounts can offer little higher rates than “classic” savings accounts (up to 0.5% for the sustainable banks and 0.85% for the systemic banks). If these accounts go with higher rates, it is because they are more binding. Indeed, the savings cannot technically be withdrawn before the accounts’ term, but if the customer insists to withdraw the money it is still possible.

Nevertheless, this will lead to the closing of the account and the abandon of the totality of the interests. These accounts are a bit similar to day notice accounts. Day notice accounts do not allow the customer to do withdrawals without noticing the bank 30 to 90 days before the withdrawal day. They are common in sustainable banks and offer better interest rates than classic accounts (appendix 13).

Depending on the amount deposited in the account, its lifetime and the local regulations, its rate

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savings account is the A booklet (Livret A in French). This account is accessible to anyone over 18 years old and is characterized by a limited amount of 22.950€, no management fees, interest rates exonerated of government taxes and unlimited free withdrawals. The main specificity of this account is that the interest rate is fixed by the French government twice a year. Also, from a bank to another, there is often no exact equivalent account. Hence, due to all these disparities, it is a bit difficult to draw conclusions. It seems, according to our sample, that systemic banks’

term accounts offer higher interest rates than sustainable banks. This can be explained by the size of these banks, the diversity of their investments, their activities’ level of risk and thus, their profits. Indeed, the net profit growth of the systemic banks is of 598.58% compared to 0.5% for the sustainable banks. Knowing that systemic banks already make more profits than sustainable banks, their accounts’ interests’ rate should be much higher. The following comparison between systemic banks and sustainable banks ones on their classic savings accounts will show if the interests’ rate gap between the two banking categories is consequent or not.

Classic bank accounts’ interest rates from our sustainable banks’ sample goes from 0% (Banca Etica) to 0.85% for Ecology Building Society. This difference can partially be explained by the fact that Ecology Building Society’s savings account has a maximum limit of £75,000 (around

$95,000) whereas other accounts accept unlimited amounts. Thus, the larger the amount, the higher the interests needed to be paid by the bank. Hence, if the amount on the bank account is very consequent, the bank would need to pay high amounts of interests. This is why they need to establish a limit that respects the breakeven point. Also, Triodos, in the United Kingdom, has an account which offers 1% interest rate but with a limit amount of £500,000 for a sole account and £1,000,000 for a joint account. Added to this constraint, above three withdrawals per year,

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the customer needs to pay some fees. But, the account with the higher interest rate and limited constraints, goes to Ecology Building Society and its regular saver account. With 1.75% annual interest rate, this account is, however, more constricting than classic savings accounts. Even if the customer only needs £25 to open it, he cannot add more than £3000 per year in the account or easily withdraw his money.

In our sample, systemic banks’ classic savings accounts’ annual interest rates go from 0.01%

(Deutsche Bank) to 0.30% (Barclays). Again, as for sustainable banks, the highest rate is given by a British bank. The average rate is around 0.15%. It seems like there is less variability in interest rates between the systemic banks than the sustainable banks.

Last but not least, both kinds of banks offer some children or youth accounts. They have a small maximum amount (1,600€ for the four systemic French banks) but higher interest rates (between 1% and 1.75%). The objective of these accounts is to retain customers from an early age. Due to their target who are not the investors, hence not this thesis’ focus, and the extremely limited amount that can be deposited, no further analysis will be performed on this account class.

To conclude, considering how low the interest rates are in the banking industry, this is not the main criterion, a potential investor will look at. In our sample, every systemic bank offers positive interest rates for their savings accounts contrary to some sustainable banks. But, even if the answer provided by Banca Etica about their interest rate policy is coherent, other banks like Triodos prefers to align themselves or even exceed their systemic competitors’ interest rates.

This strategy appears to be more interesting for sustainable banks for two reasons. The first reason is psychological. Even if an individual can only get 0.10% annual return on his

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investment, it will always unconsciously appear much better than nothing. The second reason is market-oriented. Social, ethical and environmental projects are frequently associated with philanthropy in popular belief. Hence, not offering any interest rate can unconsciously strengthen this belief, whereas a positive interest rate may surprise and attract potential customers’ attention. Even if the annual rate of return is a good proxy of performance for most of the securities, because how symbolic the rate of returns provided by banks in their savings accounts are, this parameter is not of the largest significance for choosing a bank. Also as in our sample, some sustainable banks align themselves with systemic banks, they can be considered as better options from an investor perspective, thanks to all their side benefits.