How Fintechs can help you navigate this environment and help you thrive
Low interest rates make it cheaper to borrow money. This tends to encourage spending and investment. How is this a problem for you? You are penalized for saving and it becomes harder to invest! Fintechs are rebalancing this equation in your advantage by offering alternative investing possibilities that allow you to earn the interest required to overcome the current financial environment.
Central Banks negative rate policies
The current low-, zero-, and negative-interest rate policies pursued by the world’s central banks aim to stimulate economic growth by boosting investment and consumption. However, this assumption does not hold in today’s world. While the impact of interest rates on investment is less than central bankers assume, the impact on savings is truly concerning.
The impact of interest rates on savings
The downside of persistently low interest rates isn't obvious at first blush. Reduced borrowing costs for individuals and businesses alike clearly make it easier to spend. The fact is that low interest rates hurt the earnings capacity of savers that work with traditional financial institutions:
I. Take close attention to inflation
Today, interest rates are dangerously close to inflation values. This means that you need to save more or assume additional risk in order to reach your personal financial goals. You should always consider investments that outperform the effect of rising prices in the economy, otherwise, the valuation of your investments will be fictitious, insufficient to maintain your purchasing power. If, for example, the average inflation of the last 3 years was 2%, and you want to make a long-term savings plan, you should invest so that your return will be more than 2% per year.
II. Evaluate transaction and processing costs
The Central Bank's policies have driven short-term yields so low that they are now negative in several European countries. In addition to being an unorthodox concept, negative interest rates mean that the cash held by banks costs them money instead of yielding a profit. Needless to say, the idea of charging retail customers for their deposits wouldn't go over very well… but is happening.
When considering the profitability of any investment, a factor that typically goes unnoticed are the commissions that apply to each product, both explicit (commission of maintenance, underwriting, reimbursement or brokerage) and implicit (commission of management, depository). Minimize them to maximize your returns.
Why Fintechs are savers best friend?
Necessity is the mother of invention, and in finance, the necessity is shaping up to be this: innovate to stronger returns on capital or languish as traditional financial institutions do:
I. Higher interest rates
For those that want to thrive on a low interest rate environment, Fintechs offer higher returns on savings.
II. Democratization of investing
Not everyone can save and invest. Surprisingly, there are high barriers to entry. These barriers are contributing to inequality, especially on a low interest rate environment. The rich are getting richer and the poor are getting poorer. Right now, if you want to earn interest from a savings account, you need to deposit and maintain quite a large amount of money. If you want to delegate your money to an investment professional, it is very costly too. With Fintechs, however, these barriers are so low, that become virtually nonexistent.
Do you want to share other aspects on how Fintechs are helping savers overcome the current low interest rates that you believe should be highlighted? Reach us and tell us more.
About the Author:
Carlos Boto is the blogger behind Savings4Freedom. He’s an entrepreneur, and a professor of Management and Entrepreneurship.