High-End Savings, Trends

Part
01
of four
Part
01

Consumer High-End Savings: Legal and Regulatory Analysis

Consumer high-end savings products are often subject to regulations similar to other deposit accounts. These regulations include disclosure requirements on yield, interest earned, fees imposed and account balance. Besides, there are regulations to prevent unfair practices and deceptive advertising to ensure consumer protection. A World Bank Study on "Bank Regulation and Supervision Ten Years after the Global Financial Crisis" shows that there aren't any substantial differences between high income and developing countries in the adoption of regulations.

DISCLOSURE REQUIREMENTS

  • Periodic statements of deposit products require disclosure of Annual Percentage Yield (APY), amount of interest earned, fees imposed and account balance. A higher proportion of developing countries have such disclosure requirements compared to high-income countries. For example, 42.9% of high-income countries have APY disclosure requirement as opposed to 60% of developing countries.
  • According to World Bank, "there is little difference in the shares of high-income
  • and developing countries that adopt a specific regulation." More than 70% of countries require such disclosure.
  • In the US, Regulation DD (Truth in Savings) applies to savings accounts, including high-end savings products. It requires institutions to disclose information on APY, interest rates, minimum balance requirements, and fee schedules. The regulation intends to provide consumers with sufficient and clear information to enable comparisons of offerings by different financial institutions. The law was last amended in 2011.
  • In 2015, the UK introduced measures to improve disclosure of interest rates by requiring firms to display essential information in a summary box at the point of sale and alongside account balance in all customer communication. Also, the reform necessitates banks to offer services for quick switching to a better account provided by the same bank.

UNFAIR PRACTICES & DECEPTIVE ADVERTISING

  • A high proportion of countries have regulations in place to prohibit deceptive advertising, unjust selling practices, abusive collection practices, and unauthorized use of client data or breach of client confidentiality.
  • 94.9% of high-income countries and 92.3% of developing countries have laws that restrict deceptive advertising.
  • 92.3% of high-income and 82.7% of developing countries have laws to prevent unfair or high-pressure selling practices.
  • 76.9% of high-income and 63.5% of developing countries have requirements against abusive collection practices.
  • Finally, laws against unauthorized use of client data or breach of client confidentiality are present in 89.7% of high-income countries and 96.1% of developing countries.
  • In particular, China introduced a regulation requiring banks to make audio and video recordings of the sale of wealth management products offering higher returns than a basic savings account.

OTHER REGULATIONS

  • Limits to withdrawal: In the US, Reserve Requirements for Depository Institutions (12 C.F.R. 204, Regulation D) limits high yield savings account holders to a maximum of six online and telephone withdrawals or debits per monthly statement cycle. Any excess over the defined limit may result in a penalty by the deposit-holding bank.
  • Regulating minimum rates of return: In China, the People's Bank of China (PBOC) continues to tighten reigns on structured deposits that offer higher returns on deposits. As a consequence, in 2020, PBOC decided to include interest rates on structures deposits in the macro-prudential assessment system.

RESEARCH STRATEGY

To identify the regulatory and legal trends in the high-end savings segment, we searched for global reports that capture changes in the regulatory environment in the last decade; media articles that highlight recent changes, if any; and finally, government websites that publish regulations. The team found that most countries had similar rules for all savings products, i.e., there were no distinct laws to govern high-end savings products. There was no direct evidence of how regulations have changed over the past 5 - 10 years.
Part
02
of four
Part
02

Consumer High-End Savings: Economic Trends

The COVID-19 global emergency and the anticipated global recession are examples of economic trends that are impacting or are expected to impact the consumer high-end savings products space globally. Saigon bank in Vietnam has raised interest on high-end savings accounts to attract more customers during this COVID-19 pandemic. Sweden has sensitized its citizens to be fully prepared for emergencies and this includes having high-end savings accounts. Bank of England and CitiBank are sensitizing people to be ready to face the anticipated recession and this includes having high-end savings accounts.

The COVID-19 Global Emergency

Anticipated Global Recession

Part
03
of four
Part
03

Consumer High-End Savings: Societal Trends

Societal and behavioral changes can impact the high-end savings products market both directly and indirectly. Direct impact can be felt in the conflict between generations and how they interact with the financial market and products. The low rates of financial literacy, on the other hand, impact the market indirectly, as consumers are less aware of products and more likely to make poor financial decisions, resulting in less capital available to invest in these products.

Trend #1: Financial Illiteracy

  • Growing financialization, complexity, and rapid changes are staples of the current financial scenario. However, consumers worldwide still lack knowledge regarding basic financial concepts. A 2015 worldwide study conducted by the World Bank, Gallup, and George Washington University unveiled that only one-third of the world’s adult population is financially literate. Most adults are incapable of understanding basic concepts, such as diversified investments or compound interests.
  • The degree of financial illiteracy is even higher among women, the poor, and lower educated, in both developing and advanced economies. Although income and educational levels are positive indicators, the numbers are still far from great; only 52% of adults with secondary education in advanced economies are financially literate. Even high-performing countries in Europe have many individuals that do not satisfactorily grasp the concept of interests, inflation, and compound interest.
  • Moreover, there seems to be a trend of declining financial literacy over the last few years. For instance, between 2009 and 2018, there was an 8% drop in the number of people who could correctly answer basic questions about interest rates, inflation, bond prices, financial risk, and mortgage rates in the United States, from 42% to 34%. Young people (18-34) had the sharpest drop, from 30% to 17%. Americans, in particular, are prone to have “inflated self-perceptions of their financial knowledge.”
  • Numerous studies worldwide have suggested that most people are simply not interested in the financial domain, and, therefore, are not likely to seek financial knowledge and skills. Nonetheless, the consequences of financial ignorance are more severe now than before, and these individuals may find themselves being excluded from the market and prone to perform unhealthy financial behaviors.

How the behavior impacts high-end savings products

  • Behavioral economics explains that people often have inaccurate beliefs. They are usually overconfident about their ability to manage finance, the same way the vast majority of people tend to think they have superior "intelligence, health habits, driving habits, immunity to cognitive biases, and chances of succeeding in a startup business."
  • People also tend to be risk-seeking for low-probability gains or high-probability losses. Both tendencies can explain "behaviors that appear myopic or foolish, such as chasing ill-fated get-rich-quick schemes or purchasing lottery tickets, while neglecting the slow and steady accumulation of savings."
  • With a lack of financial literacy, consumers are exposed to a second barrier, also explained by behavioral science: choice overload. Studies have shown that when people are offered fewer options, they are more likely to decide than when offered a large variety of choices. Without a simple way to make a selection, the very process of making a choice can be daunting enough to delay or even prevent the person from making a decision at all, such as choosing between the different types of high-end savings products.
  • Several empirical studies found that poor financial literacy is also associated with poor risk diversification, inefficient portfolio allocations and low levels of savings. A comprehensive study conducted in Europe, in 2011, showed that financial literacy is directly connected to consumers' willingness and ability to save money, and therefore, the likelihood of acquiring high-end savings products. Another study conducted in 2015 had similar results, this time exploring consumers in Australia.
  • People with less financial education are also less likely to adopt more sophisticated products, such as high-end savings or money market, as they are anxious and intimated by how they work, and are likely to have misconceptions, such as believing they are unsafe or require large sums of money.
  • For saving products, the gap becomes more evident. Globally, 57% of adults save money, but just 27% use a bank or other formal financial institution to do so. The World Bank — Gallup study suggests that improving financial literacy might help savers get a better deal, such as higher-yield savings. For instance, about 50% of account owners in China use their accounts to save money, but only 52% of those understand how interests work.
  • Another issue created by financial illiteracy that impacts high-end savings products is the amount of debt it creates. With the lack of knowledge about interests and compound rates, many adults are raking up debts higher than they can manage, which is limiting how much they have to put towards savings products. Credit products are becoming more readily available, and without the necessary financial skills, they can easily lead to high debt and insolvency.
  • For example, more than 40% of Americans stated they do not plan ahead financially. Meanwhile, 40% would not have enough savings to cover three months of living expenses, while 12% would not have enough to cover one week. Thirty-four percent are not capable of paying their bills on time, and nearly 30% stated they have more debt than is manageable. For younger generations, the number is higher, with 55% of those in the 26-49 group saying they do not have enough to cover three months of living expenses, a 4.8% increase over 2018.

Consumers in the U.S. do not understand high-yield saving accounts

  • Consumers in the U.S. do not understand how products, such as high yield savings accounts, work. A recent survey conducted by Credit Karm discovered that only 25% of respondents have a high yield savings account. When asked why they refrain from pursuing this product, 44% said they believe the minimum deposit would be too high. Another 21% stated they do not know what it is or how it works. That means that 65% of American consumers have misconceptions or a lack of knowledge about the product.
  • Another research conducted in the U.S. and the U.K. discovered that 40% of consumers find saving accounts difficult to manage. Only 24% said someone from their financial service providers has reviewed their savings account and offered advice on getting more out of their money.
  • North Dakota, which ranked 4th out of all 50 states on a financial literacy assessment, had the highest percentage of respondents at 55.5% declare they had an emergency fund. Although the type of savings product was not specified, it is reasonable to presume the state has a higher adoption of high-end savings than states with lower literacy.

Trend #2: Younger Generations are Less Loyal and More Open to Alternatives

  • Millennials are more likely than Gen Xers and Boomers to use digital alternatives and to be less loyal to a bank. As Gallup discovered, they are 2.5x times more likely to switch their primary bank than Boomers, and 1.5x times more likely than Gen Xers. Younger generations are also more disengaged with their primary bank. They are also more likely to change banks if their savings accounts have service charges or account fees.
  • Younger generations view online customer experience as having a greater value than their older counterparts. They are more likely to prefer to interact with their bank online than face-to-face, with 84% stating that their relationship with their bank is primarily digital. 20
  • The low engagement rates are directly connected to their lower levels of satisfaction with the online channels banks offer, as they are more likely than Boomers and Gen Xers to be dissatisfied with their online banking experience.
  • Younger generations are also more open to challenger financial institutions. For example, 41% of global Gen Zers would be willing to acquire banking services from an online provider, such as Google or Amazon, compared to 31% of the overall population. They also want to engage and contribute to helping shape future banking products (36% versus 8% of Boomers).
  • As reported by Forbes, banks overlooked millennials and kept allocating most of their budget to traditional media, which opened the space for challenger banks to captivate the cohort. As a result, most millennials are not loyal to their banks, and 53% believe their bank does not offer anything different from other banks.

How the behavior impacts high-end savings products

  • Byron Marshall, Director of Research at BAI, explains that consumers are starting to “overcome their inertia.” For instance, Millennials are twice as likely to move to higher-paying online banks than Gen Xers.
  • Research suggests that never before have generational differences played such a “big role in deposit gathering, and increasingly aggressive online direct banks join fintech players, further complicating the competitive battlefield.” While many institutions are still focusing on older generations, with higher incomes, millennials are the ones more likely to leave the institution.
  • A recent study discovered that 75% of millennials feel it is imperative to shop around for best interest rates, as opposed to only 46% of Boomers. Sixteen percent of the cohort, far more than other generations, say they actively track deposit rates and will move for a better one.
  • Millennials also show a greater sense of urgency than older counterparts. Millennials’ top three goals are: building emergency savings, having extra discretionary funds, and saving for a vacation. One in three saves towards home purchases.
  • Millennials and Gen Xers are the ones less likely to hold certificate deposits (CDs) comparing to Boomers (19%) and Traditionalists (23%). A recent survey discovered that only 9% of millennials hold CDs; however, 47% would be interested in the same product if named differently, showing that millennials do not understand CDs and that the terminology used by banks does not resonate with millennials and Gen Z.
  • Mark La Penta, Principal at CCG Catalyst Consulting Group, explains that startups such as Nubank, Revolut, Varo, and Marcus, use different terminology to describe their products than traditional banks, making it less complex.

Nubank attracted over 20 million customers offering high-interest accounts with no fees

  • Challenger banks’ customer base continues to grow. Nubank alone has 20 million customers, making it the sixth-largest financial institution in Brazil. In August 2019, the bank, which operates mainly in South America, had 15 million users.
  • Chime in the U.S. had 1.6 million accounts in 2019, while Marcus by Goldman Sachs enrolled more than 4 million clients, with $40 billion in deposits in the U.S. and the U.K.
Part
04
of four
Part
04

Consumer High-End Savings: Technological Trends

Banks are investing billions in technological advancements for their business. Technology is improving customer satisfaction, reducing operational costs which provides an opportunity for higher customer savings, and helps banks retain and attract new clientele. Some technological trends found within the high-end customer savings products and services space include: the increase of online only entities, the use of artificial intelligence to perform tasks like automating customer service or mitigating risk, and bank/fintech partnerships to boost deposit growth.

Online Only Banks

Artificial Intelligence

  • The anticipated cost savings from the use of AI is $447 billion by 2023.
  • Within the top seven banks, chatbots make up 13.5% of the AI products, 25% around customer service and marketing and 56% with use of AI to mitigate risk.

Fintech Partnerships

Research Strategy

The trends were identified by drawing upon multiple sources that identified why and how banks use technology to maintain competitiveness among customers seeking higher returns. Also, a focus was made on the customer expectation in an increasingly technological financial environment.
Sources
Sources

From Part 02
From Part 03