Until recently, banks collected deposits only from their own customers, paid them interest, then used the funds to make loans, usually to those same clients. Today, savings platforms are revolutionizing deposit taking and more broadly, the funding of banks. Although digital deposits--raised online directly by a bank without branches--are not new, what is novel are online platforms that bring together the savings products of many banks.

In the €8.4 trillion market for household deposits in the eurozone, deposit platforms bring together savers and fund-seeking banks, offering mutual rewards: Savers benefit from a wide choice of product providers, greater price transparency, and digital convenience without having to bother with new know-your-customer (KYC) procedures every time they move their deposits to another bank. For banks, the platforms provide a large pool of retail clients with cash to deposit--outside of their traditional retail operations. As such, online marketplaces can be a useful addition to the treasury toolbox of some banks, particularly smaller ones without a retail franchise or strong brand. For these banks, deposit platforms can present an efficient and flexible way to diversify their funding mix. And for other banks, the platforms provide a way to manage excess deposits. Everyone wins, it seems. Or do they?

Like regulators, S&P Global Ratings considers brokered deposits as more rate-sensitive and less sticky than those originating with well-established retail banking franchises with anchor or multiproduct retail accounts. In the absence of a customer relationship that goes beyond brokered deposits, we see little to stop anxious customers from moving their funds to other banks in times of stress. This makes brokered deposits a more tenuous funding source.

This flexible funding option also comes at a high cost. On average, offers on Raisin and Deposit Solutions currently pay about 0.40%-0.50% on one-year term deposits at a time when many banks pay next to nothing. Fees for the deposit platform come on top. Given these high costs, this funding source only suits banks that cannot access retail deposits otherwise or those with higher-yielding assets--often riskier institutions.

The looming collapse of Germany-based Greensill Bank is a reminder to retail depositors that higher rewards are typically associated with higher risk. Although most retail deposits via platforms are covered by deposit guarantee schemes (DGS)--just like deposits in traditional banks--their risk ultimately depends on the capacity of the insurance fund and the sovereign to cover potential losses, and those vary widely across countries.

How Do Deposit Platforms Work?

Deposit platforms connect savers and banks and facilitate the placement and transfer of deposits. They provide a new way for banks to gather sight, term, and callable deposits from retail customers outside their typical client base or geographic home turf. The pace of development and shape of the broker market takes different forms. In the U.S., brokered deposits and certificates of deposit have been around for decades and comprise close to 8% of banks' funding. In Brazil, the concept is up and coming with the emergence of retail broker XP.

In this report, we focus on the leading pan-European deposit platforms operated by the German fintechs Raisin and Deposit Solutions. Their business model uses two different, yet complementary, channels (see chart 1):

Direct platforms.  From business-to-consumer platforms--such as Weltsparen run by Raisin--retail clients can allocate funds to multiple banks via a single clearing account. The platforms, or a white-label bank in the background, onboard retail clients and pass the deposits onto the bank while the funded institutions typically do not have direct contact with the retail customers.

Indirect platforms.  The deposit platform is embedded into the digital offering of a retail bank, which gives its customers the option to place funds with other banks at higher rates.

The Benefits Are Mutual

The benefits for retail clients are clear. Deposit platforms make it convenient for clients to shop for the highest returns because of their transparent products, easy switching options, and because the services are typically free of charge. In our view, this offer appeals to two types of customers: First, clients trying to eke out higher returns, when many banks pay next to nothing for deposits; and second, high-net-worth customers distributing cash holdings across different banks up to the maximum insurable amount of €100,000 per individual per bank in the EU to ensure their deposits are guaranteed.

For banks, deposit platforms provide a flexible and efficient way to raise deposits at the volumes, tenors, and currencies needed. By adjusting the terms of their products, banks can actively steer the inflow of deposits from a large pool of potential depositors--quickly, if needed. At the same time, banks can avoid the fixed expense of building branches or offering their own online deposit products. Instead, deposit platforms typically charge variable fees, solely based upon the actual volumes of mediated deposits.

This flexibility is also the main differentiator to proprietary online deposits by individual banks. This model works for some. Goldman Sachs Group Inc., for example, has collected about $97 billion in retail deposits via its Marcus product as of December 2020. However, we believe many small institutions lack the brand and scale to quickly collect larger amounts of deposits directly from clients with proprietary solutions. As such, it is no surprise that primarily smaller niche players place their deposit products with marketplaces where the variable charges from the deposit platforms are often less than the fixed costs of setting up and running a proprietary online offering.

Deposit platforms also handle most tasks in the process for banks. However, the extent of operational relief depends on the legal counterparty for the deposits. For European platforms, the contractual relationship is directly with the retail client, which means a bank needs to onboard the client onto its own systems and service the deposits. Yet, it relies on information gathered by the platform during customer due diligence and KYC procedures. While this is generally permitted by EU anti-money laundering directives, it exposes banks to risks since they remain ultimately responsible for any breach in compliance or liabilities arising from deposits sitting on their balance sheet. To lessen such risks, we expect most banks will establish a second layer of control for incoming deposits and closely monitor procedures followed by deposit platforms or the acting banks.

By contrast, the operational burden for the bank is much smaller when the deposit platform is the bank's contractual counterparty. We understand Brazilian broker XP applies this model, which adds concentration risk in our view as the broker can move the entire deposit in one go. Additionally, deposits that banks source via this model typically do not classify as retail deposits for regulatory funding and liquidity ratios (see table 1).

Table 1

Rates offered on platforms usually far exceed the national average due to competition and transparency. For this reason, deposit marketplaces are mainly attractive to banks that lack reasonable and cheaper alternatives and have strong asset yields that balance higher funding costs. This includes many banks with a higher risk profile, for which the offered rates on deposit platforms are below what they pay on their other funding, suggesting some margin benefit from brokered deposits (see chart 2).

Chart 2

Offloading unneeded deposits can ease the squeeze on margins from negative rates

Some banks have turned the main, deposit-gathering premise of a deposit platform on its head by using the tool to push their customers to place funds with other banks. While perhaps counterintuitive at first sight, banks do this for two reasons, making it a win-win for them and their customers:

• Customers can earn higher rates at another bank, and
• Banks can lessen pressure on margins and revenue.

This is particularly relevant for banks with structurally high deposit bases, notably in Germany, which since the onset of COVID-19 have been overwhelmed by surging deposits--households increased savings as lockdowns curtailed leisure activities--on which they earn zero or even negative yields (see chart 3). With few options for investing these deposits other than in low- or even negative-yielding central bank accounts or government securities, German (and other eurozone) banks have increasingly passed through negative policy rates to companies, institutions, and higher-net-worth individuals. But they are still more reluctant to do so for individuals who could more easily shift deposits into cash, particularly for insured deposit balances below €100,000 per customer and bank (see "Low-For-Even-Longer Interest Rates Maintain Margin Pressure On European Banks," published on Feb. 2, 2021). This is critical since the total value of household deposits at eurozone banks are almost three times those from corporates.

Chart 3

There is the possibility, of course, that the relationship with customers could weaken if they are seduced by offers from their new depository bank. But where these are primary customers, banks see this as at worst likely to maintain the customer relationship, and they could even deepen it by offering this efficient solution within their own customer interface.

A handful of banks currently work with deposit platforms under this model, embracing the open-banking concept of platforms. The most prominent example is Deutsche Bank, which integrates Deposit Solutions' indirect platform into its online offering, where its customers can directly place their deposits with six other banks. As we don't anticipate a rise in policy rates in the eurozone soon, we believe more banks will follow this path. That Deutsche Bank receives fee income based on mediated volumes is an additional incentive, though we assume that stream of income would be small. A similar arrangement exists between Raisin and Commerzbank AG for corporate clients, although their deposits are treated less favorably for regulatory liquidity ratios, and should, at least in theory, be less attractive to fund-seeking banks.

Deposit platforms can also support the efficient distribution of deposits among banks--the role so far of interbank lending. A bank's usage of deposit platforms essentially pushes the counterparty risk to the retail clients, or ultimately, the deposit insurance schemes. Nevertheless, we believe the bank that sends customers to deposit platforms still faces reputational risk, for example, in case of default, of the receiving bank. However, a selective choice of receiving institutions can reduce this risk. The recent start of the insolvency proceedings of Germany-based Greensill Bank, which collected large amounts of retail deposits via deposit platforms, highlights the relevance of this factor.

A bigger benefit: the integration of deposit markets across Europe

We believe the business model of deposit platforms takes advantage of the fragmentation of European deposit markets. Indeed, as of January 2021, less than 1% of household deposits in the eurozone were crossborder, according to European Central Bank data. As a result, the variation in deposit rates among countries is still wide, even within the eurozone (see chart 4).

Chart 4

Deposit platforms take advantage of this variation to offer customers--the largest group being Germans--higher rates abroad. Placing deposits with foreign banks often proved to be a bureaucratic nightmare in the past, but platforms simplify that. Via a platform, placing deposits domestically or in other eurozone countries is largely seamless for retail clients. Viewed through the lens of economic rationalism, deposits would flow freely from countries with an excess supply of funds and offering lower interest rates on deposit products to markets offering higher rates. As such, it is no surprise that the main European platforms originated in Germany, whose households have a high savings rate and an historical aversion to capital markets.

Crossborder deposit platforms are finding support from cheap intra-EU money transfers and a harmonized rulebook, comprising anti-money laundering rules and deposit guarantee schemes (DGS). Harmonized DGS in the EU ensure up to €100,000 per person and credit institution. Nevertheless, each country's scheme has different characteristics, and we believe depositor confidence highly depends on the credibility and strength of the national scheme, and ultimately, its sovereign backing. Note that crossborder deposits within the EU are covered by the DGS of a bank's home country, and banks in peripheral Europe as well as Central, Eastern, and Southeastern Europe are the most active advertisers on these platforms (see chart 5). These sovereigns have mostly lower credit ratings than their Western European and Nordic peers, which suggest lower capacity to support DGS if needed.

As a result, we see trust, or the lack thereof, as an important inhibitor to crossborder deposit flows in practice. For example, German depositors take great comfort from their own DGS, not least because of some bias in favor of their own domestic banks. Even if deposits are placed crossborder, adverse economic or political shocks may prompt depositors to withdraw or transfer their funds. What's more, crossborder reimbursement of depositors is likely to be more cumbersome in practice. These risks were highly evident in 2008 when Iceland-based Kaupthing Bank and Landsbanki defaulted and the Icelandic DGS was unable to honor the resultant claims. This left many foreign depositors waiting for compensation for more than six months. Additionally, DGS from noneuro countries typically repay depositors in the local currency, even if deposits were initially made in euros, which introduces some foreign exchange tail risk.

Chart 5

Adoption of the much-debated pan-European deposit insurance system (EDIS) could help overcome these hurdles, at least within the eurozone, and support depositor confidence by pooling risks at the level of the European banking system. However, it has remained difficult to reach a consensus on the design of the guarantee scheme, which remains the principal unfinished element of the Banking Union.

There Are Risks For Banks Because Intermediated Deposits Are Less Stable

S&P Global Ratings typically views deposits gathered via deposit platforms as less stable and more confidence-sensitive than those collected by well-established retail banking franchises. Despite a large pool of available and often prefunded accounts, banks are competing based on transparent pricing with little product differentiation. Therefore, competitive yields above the market average are the most effective way to gather new deposits or rollover maturing ones, even in good times.

In times when banks or countries face a stress, to lure apprehensive customers, banks may need to pay a premium for deposits, straining liquidity and profitability, which could create a vicious cycle. While the same principles apply for other types of funding, we believe greater transparency, convenient switching options, and the lack of a solid relationship make it easier for customers on platforms to withdraw their deposits and harder for platforms to attract new ones. The lower stability of intermediated deposits is acknowledged in the Basel III liquidity coverage ratio, which assumes higher outflows of online deposits in a stress scenario than those arising from stable customer relationships. Additionally, deposit platform operators could lock out struggling banks from the platform and essentially stall any inflow of new deposits.

For rated banks, we typically view deposits sourced via platforms negatively in our funding and liquidity assessments, but to varying degrees. Our funding analysis comprises a mix of quantitative and qualitative factors to determine the stability and potential volatility of a bank's funding compared with the domestic average (see "Banks: Rating Methodology And Assumptions," published on Nov. 9, 2011). Our liquidity assessment analyses a bank's risk of, and preparedness for, adverse liquidity events. However, we don't view brokered deposits as a completely uniform type of funding. For example, a book of longer-dated and staggered term deposits without early withdrawal options, even if collected via platforms, could be resilient in case of liquidity stress. Similarly, we would view brokered deposits less negatively in our funding assessment:

• If they are one of many sources that a bank uses and,
• If the rates paid are comparable to the average cost of deposits across a banking industry, which would suggest the bank has some brand recognition or another competitive edge.

Although deposit platforms are set to continue their rapid growth, we expect their use as a funding vehicle will remain constrained to specific types of banks, at least in the next few years. That said, if banks increasingly shift their deposit funding activities onto platforms or if these marketplaces destabilize deposits in a banking system, this could weigh on the ratings of individual banks or our banking industry country risk assessments of systemwide funding. We believe that in times of general market stress, retail deposits will find their way back to major franchise banks and sectors. However, we continue to observe that in the never-ending hunt for yield, retail depositors tend to ignore risk.

The Intermediated Future

Traditional banks and online savings platforms are seeing record amounts of household deposits during the pandemic, which come at a time of extremely low--even negative--interest rates. This unusual situation has led to high growth in and record levels of household deposits, and a glut of savings in Germany, for instance. There, we have seen the development of the leading pan-European deposit platforms, operated by the fintechs Raisin and Deposit Solutions, the focus of this report. Deposits on these platforms have reportedly grown strongly during the pandemic, and each has attracted a total of roughly €30 billion since inception. Some German banks, reluctant to pass on negative interest rates to their retail customers, as they do for their bigger clients, are using the platforms to satisfy their customers and protect their margins--a win-win situation. Nevertheless, banks that use platforms for funding face risks because deposits there tend to be less stable. In a stress scenario, we believe customers will be more loyal to their home bank, if they have a strong relationship, than banks behind the platforms they use. What's more, the higher costs of deposits via platforms have so far mainly attracted banks that lack cheaper alternatives, often smaller and riskier institutions.

What will the future bring for deposit platforms, when the pandemic is under control, consumption returns, and savings turn into spending? And, when interest rates rise? At the very least, we expect more banks to invest in indirect deposit platforms as a way to better manage deposits but keep clients nearby, especially in times of negative interest rates or massive inflows of savings. The trillion-euro question is what will happen to deposit platforms when the EU adopts pan-European deposit insurance and the Banking Union sees the light of day. By that time, it may be that banks will have delegated this increasingly commoditized business to digital operators.

Writer: Rose Marie Burke. Digital Designer: Joe Carrick-Varty.

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