You've probably heard a lot of news about rising interest rates in recent months. The European Central Bank regularly announces increases in its key interest rates at press conferences, politicians want to help people with high mortgage repayments, and you won't get as good a deal on consumer credit as you did a year ago.

However, in this rollercoaster, one type of interest rate remains without significant growth - that on deposit products. The central bank's deposit rate has risen to 4%, with interest on new mortgages exceeding this level. Meanwhile, the average interest on Slovak savings accounts is hibernating at 0.67% (calculated as the average of banks' savings accounts in the table below). 

And even this figure is distorted mainly by Prima banka's offer. Its savings account with a 5% rate sounds extremely generous at first glance. However, to get it, you have to meet unusually strict conditions: you can only save a pre-agreed amount of 10-50 euros per month (no extraordinary one-off deposits or higher monthly amounts), you have a precisely agreed savings period of 12, 18 or 24 months (early withdrawal will deprive you of all interest) and you can't skip a single monthly payment.

In addition, you must have a current account with a fee of €4.90 per month, which will easily eat up all the interest. To waive it, you would have to have an average daily credit balance of more than €15 thousand or pay €980 per month by mobile phone, which is not an affordable option for many Slovaks. It is therefore not a product that we typically imagine when we hear the term savings account.

If we do not include it in our calculation, the average interest rate of savings accounts drops to 0.31%. And that's still not counting the 19% withholding tax, which further lowers the credited interest.

Term deposits are a little better off, with an average of 2.8% in June. However, this figure is dragged up by offers with extra favourable interest, for which you have to meet various conditions, e.g. buy a mutual fund in a given bank, open another fixed-term account with a longer term, or use a regular account with a certain turnover and number of set standing orders. Not to mention that if you need to withdraw the money before the commitment period expires, you will lose all the interest.

We've listed the basic interest rates for time deposits with an annual commitment in the table below. You don't need to meet any additional conditions or buy another product to get these interest rates. An exception is the deposit from J&T bank, which offers an attractive interest rate, but you have to invest at least 10 thousand euros in it, which is not an affordable option for many households. You can see that these rates are not very high on average (and they still do not take into account the aforementioned 19% withholding tax).

Source: websites of individual banks as of 7.9.2023

Why are the deposit products that provide the most benefit to ordinary people lagging behind? In this blog, we've put together some answers. We'll try to shed some light on what's causing interest rates on savings accounts to rise, when it might occur, and what you can do for your savings right now.

How Do Banks Work?

Let's start with a simplified explanation of the banks' business model. These institutions raise money by accepting deposits from savers, who are paid a certain remuneration (interest) for allowing the bank to use their savings. They keep a portion as a reserve to meet the demand for withdrawals. The rest is loaned to clients in the form of mortgages, consumer loans or loans to businesses.

Borrowers have to repay these loans with some extra interest. Banks typically charge more interest for lending than they pay on deposits to cover the risk of defaults and keep the difference as profit. The earnings on the difference between the interest on deposits and loans is called net interest income. The lower the interest on deposits compared to the interest on loans, the higher the profit banks make.

Of course, today banks operate in a slightly more complicated way. They have more options for raising and making money. In addition to lending, they also draw income from fees, investing in safe securities or depositing reserves in interest-bearing accounts at the central bank. In addition to deposits, they can also finance themselves by issuing bonds or borrowing from other banks. However, it is still the case that if interest rates on deposits are lower than those in the rest of the economy, banks benefit.

The figures from Slovakia prove this. In the first half of this year, the Slovak banking sector earned a net profit in excess of EUR 564 million. Compared to the same period last year, this is an increase of 46.6%.

Why Are Interest Rates Not Growing?

Interest works like any other price in a market economy. In this context, it is the price of our service to the bank: we lend it money for a short period of time (since we want to withdraw money from deposit products in the foreseeable future, long-term savings are better appreciated by investing).

Market prices vary according to whether there is a shortage or a surplus of the service. If there is a shortage of something, sellers can charge higher prices. If, however, there is a surplus, sellers lower prices in an attempt to attract buyers to generate at least some sales.

This works similarly for bank deposits. If there is a shortage and the banks have to fight for them, they will raise interest rates to attract savers. However, if they have more than enough deposits in their vaults, they have no reason to raise interest rates, as they would unnecessarily increase their costs and cut into their profits.

Increasing profits is important for bank managers nowadays, as the ECB has kept interest rates at zero for several years, causing years of miserable profitability in the banking sector. At the moment, this is putting pressure on managers to finally increase profits if they have the room to do so.

Today, it looks that banks still have more than enough deposits. Slovaks hold almost EUR 43 billion in deposit products (according to NBS data for June). They did start to decline slightly at the beginning of the year (in January, we were the only country in the Eurozone to see a decline), but not at a dramatic pace.

Banks need to hold cash reserves in the form of deposits to meet the demand for withdrawals and to manage to repay their liabilities. In this regard, banks in the euro area remain very well covered, with the regulator reporting in April that they hold 160 percent of their expected cash needs in reserves. Even UniCredit's chief executive said his bank is so well positioned in terms of cash reserves that it can afford to chase profits for now by holding lower interest rates on deposits.

In addition, interest in loans is expected to fall because of high interest rates. For example, the volume of mortgages initiated in the first quarter of 2023 has already fallen by 31% compared to the average quarter of the previous three years. Therefore, banks may not collect as much money on deposits to make new loans.

Yields Within Reach

Meanwhile, rising interest rates in the economy should, in theory, create a fierce competition for deposits. In fact, the yield on other short-term instruments into which people can move their savings has risen. To halt the outflow of money, banks would have to raise interest rates on deposit products.

Such instruments include short-term bonds of rich countries or large corporations. There are also ETFs that directly replicate central bank interest rates.

Savings products and money market funds can build on all of these instruments, giving them the potential to give ordinary people a return at market interest rates. Why, then, is there not a greater outflow of money into similar instruments, products or funds?

It probably has to do with the adage from the introduction of the blog. People are naturally loyal to a bank they have had an account with for a long time and have become accustomed to. Transfers may sound like an unnecessary time and technical burden. And last but not least, there is low awareness of these tools and how they work. After all, the workings of bonds or ETFs is not a simple subject and few attempt to explain it in plain language.

So When Will Interest Rates Start to Rise?

Finding an exact answer to this question is difficult. The previous section suggests that interest rates on deposit products will start to rise when banks face an outflow of deposits in favour of more profitable products. Slovaks have probably already realised this to some extent, as the volume of deposits dropped at the beginning of the year and some banks have increased interest rates on time deposits (however, there are still many conditions attached to more favourable rates).

On this issue, a chart published by the Financial Times in their article caught my attention. It shows what percentage of the rise in central bank interest rates has been passed on to deposit products by banks in a given country. For each country, it counts the period during which the central bank raised interest rates (for the ECB, the calculation is for the period June 2022-May 2023).

The ranking is dominated by British savers, to whom the banks have passed on 43% of the interest growth. Slovakia is below the Eurozone average with a 15% "pass-through", but we are not among the worst performers.

What causes these differences? An analyst at S&P Global Ratings says in the article, among other things, that banks in the UK face more competition, especially from non-bank financial institutions. There has also been a high rate of switching in France, where banks are having to match the popularity of the Livret A savings account, whose interest rates are set by the government and linked to inflation (so they are currently high).

This means that the countries with high interest growth on deposit products have one thing in common. They have a competition of advantageous savings products offered by various financial institutions. Moreover, transfers to these products are technically easy and the citizens of the countries concerned have not hesitated to take advantage of them.

What Can I Do About This?

I smiled while reading the above article, as it reflects one of the reasons why Finax came into existence. We wanted to bring more competition to traditional institutions in the Slovak market. To provide clients with more information about their financial options and to introduce technological innovations that would make it easier and cheaper to handle personal finances.

If you want to push Slovak banks into raising interest rates on deposit products, look around for better options such as short-term bonds of developed economies, ETFs linked to central bank rates or cheap money market funds. As part of your search, consider our newest product, the Smart Deposit. In our eyes, this is an unbeatable solution for people who want to benefit from rising interest rates without the extra terms and conditions associated with fixed deposits.

The Smart Deposit is built on ETFs replicating the short-term interest rate set by the ECB and bond yields with maturities of up to half a year. Its current gross yield is 3.8% per annum (at the date of the blog post), reflecting market rates. Note that this yield is linked to central bank interest rates and will therefore change if the ECB changes them. We only deduct a single fee of 0.5% per annum including VAT, making it our cheapest product.

A number of clients have already had no hesitation in taking advantage of the Smart Deposit. You can see its steady development via Dominik Hrbatý's transparent account, which is also pictured below. The graph shows a period of over three months from 3.7.2023 to 11.10.2023. This shorter period also explains the 0.85% return achieved so far - the announced 3.6% is an annual return, so it will gradually pay out over 12 months.

We've made sure that using the Smart Deposit is as easy as it can get for ordinary people. You can open an account on our website or app in 10 minutes. You don't have to leave the comfort of your couch. If you request a withdrawal, your ETFs will be sold the following Tuesday and the money sent on Thursday, so they're available very quickly and you don't have to do anything apart from submitting a request. A detailed introduction to the product and how it works can be found at this link.

Experience from other countries shows that if you want higher interest rates on savings products, you need to take action. Don't wait for a miracle or special bank taxes. You know those decisions that you put off out of convenience, but in the end can be handled in a moment and make your life better? This is one of them. So go ahead, let's not be a country where we'd rather leave the marriage than the bank (after all, financial satisfaction leads to happier relationships, among other things).