Should I open up a new savings account to optimise my risk free interest rate? - All you need to know about savings accounts as a Dutch resident.
Michaelangelo Aboyade-Cole
In these times of rising interest rates and with the European Central Bank (ECB) trying to fight inflation, it is pertinent for anyone to optimise their risk-free interest rate. With the encouragement of the ECB, in 2022, Dutch banks started increasing their interest rates. This overall rise of interest rates has led to a larger variation of offered interest rates among banks. The increasing gap between interest rates may have become that large, to be interesting enough for you to open up a (savings) account elsewhere. Keep reading to find out for yourself whether the risk/reward ratio is good enough to open up a new savings account. It may be more interesting than you think.
Traditional banks
Starting in 1814 when De Nederlandsche Bank was created, the Dutch banking system has become one of the most stable and reliable in the world with excellent credit ratings. Included in this financial system are traditional banks that we all know for decades and where most of us keep our savings.
The table below presents a selection of banks with a strong track record, having been in operation for over 30 years, along with their current interest rates:
| Bank | S&P LT Rating | €0-€10,000 | €10,000-€20,000 | €20,00-€25,000 | €25,000-€100,000 | €100,000-€1M | €1M-€5M |
|---|---|---|---|---|---|---|---|
| ABN-AMRO | A | 1.5% | 1.5% | 1.5% | 1.5% | 1.5% | 0% |
| Rabobank | A+ | 1.7% | 1.7% | 1.6 | 1.6% | 1.5% | 1.5% |
| ING | A+ | 1.5% | 1.25% | 1.25% | 1.25% | 1.25% | 0% |
| SNS Bank | A | 1.7% | 1.8% | 1.8% | 1.6% | 0.6% | 0.6% |
Interest rates valid at 16/10/2024
It is important to remember that these interest rates are annual interests and the interests accrued are paid annually. For example, if you save €1000 in ABN AMRO for one year at 1.50%, you would only earn 15 euro. A tad abysmal. Unfortunately, that is the trade off that occurs when banking with traditional financial institutions like ABN AMRO and ING.
This is where non-traditional financial institutions come in. Online banks and platforms have come in and changed the game. They offer higher interest rates on different levels of amount saved. Think of them as the new kids on the block trying to offer a cleaner, more customer focused service to clients.
We found that the best of these are:
Trade Republic: This is a German online bank with over 4 million users, that offers a high yield savings account of 3.25% on amounts up to €50,000. The interest is accrued daily and paid out at the end of the month. This means you would be earning interest on the previous month’s interest as well, resulting in an effective interest rate of 3.298%.
Raisin: Previously known as SaveBetter, is an online platform that helps consumers compare interest rates between banks, savings accounts, money market accounts, and collateralized debts. It allows customers to take advantage of different interest rates and bank accounts across Europe that suit their situation. The platform also provides credit statuses, as provided by the independent credit ratings agency Standard and Poor’s for the country in which the banks are registered. The rates and accounts are updated very frequently but the highest rate currently offered is a 3.18% per year.
Medirect: Me direct: Me Direct is a pan-European retail digital bank of Maltese origin. It offers various products but the current interest rate on savings is 3.1% per year. The interest accrued is paid out bi-annually, resulting in an effective interest rate of 3.124% on savings.
Revolut: Revolut Bank is a global neobank and financial technology headquartered in the United Kingdom and incorporated in Lithuania. It offers numerous products and financial packages but its savings packages include the ability to save in multiple currencies, currently Euros, US Dollars and British Pounds. The highest interest currently offered on the Euro mutual money fund is 3.50% annual percentage yield (APY). You would, however, have to subscribe to their Ultra plan (currently €60 per month) to gain access to this interest rate. It would be important to invest an amount that covers the taxes on interest accrued and the cost of the plan annually. Currently, you would need to invest €20,571.43 to break even on the annual subscription cost. There is no maximum amount that can be invested, but only €22,000 is protected by the Republic of Lithuania Insurance Investors scheme in the event of insolvency.
| Institution | €0-€50,000 | €50,0000-€100,000 | Effective Interest Rate |
|---|---|---|---|
| Trade Republic1 | 3.25% | 0% | 3.298% |
| Raisin1 | 3.18% | 3.18% | 3.227% |
| MeDirect1 | 3.1% | 3.1% | 3.124% |
| Revolut2 | 3.53 | 3.53 | 3.5567% |
Interest rates valid at 16/10/2024
1. Insured up to €100,000
2. Insured up to €22,000
3. A higher interest of 4.94% is offered by Revolut but it is for it's Dollar mutual fund.
Why the different rates?
These interest rates between 3 and 4% are between 150 to 250 basis points more, annually, than the interest rates at the traditional banks. This in practice would lead to 150 to 250 euro more interest on €10.000 worth of savings. This effect becomes larger over time when we consider the compounding interest effect.
The main reason the interest rates on deposits are higher for these institutions is simple: traditional banks have kept their interest rates lower than they should. These banks understand very well that customers are unlikely to move banks due to the high switching effort, as has been researched by Thomas Bollen here. ING, for example, made €7.3 billion in net income last year despite having a “challenging” year. This profit was achieved largely in part by the increases in the European short term interest rates not being passed along to customers.
For Trade Republic for example, the interest rate for amounts deposited with it is 4% and with the ECB paying 4% as well for the overnight deposits banks have with them. Essentially, Trade Republic matches the interest they could generate from depositing money into the ECB to pay interest on the amounts deposited in the savings accounts they offer. What does Trade Republic get in return? Potential customers that could result in increased profit from the other services the platform provides. Customers are then encouraged to open trading accounts and use their other services. It is both a marketing ploy and a tool to encourage customers to use their other products that would generate revenue for the bank. Similarly, Me Direct and the banks that Raisin partners pass along the increased interest rate to customers, albeit at a lower rate than Trade Republic.
Traditional banks could do this but it appears they do not have the incentive that smaller banks do to attract new customers using higher interest rates. While traditional Dutch banks generally offer a higher credit rating (and therefore in theory lower probability of default), you can, in the event of a bank failure, still rely on the deposit guarantee scheme of the respective country for an amount up to €100k. This makes the reliability of the deposit guarantee scheme of the country of the bank perhaps more important than the bank's rating itself. With that being said, we think it's smart and valuable to open up a savings account with high interest rate in any euro country as long as the country that arranges the deposit guarantee scheme has a decent credit rating.
Conclusions
Current economic conditions in Europe have made it imperative for any individual to make wise choices with their hard earned funds and optimise their risk free interest rates. The Dutch banking system, world renowned for its stability and reliability, offers savings accounts with a variety of interest rates. Unfortunately, whilst these institutions are well known, they may not provide optimal rates.
Stepping out of the traditional Dutch financial system provides us with more opportunities to gain access to higher yield returns without additional risk. Institutions like Trade Republic, Raisin and Me Direct offer higher yields on savings that are up to 1.7x higher, illuminating an avenue for those seeking higher returns. Trade republic offers the best interest rates up to 50k savings with great insurance through the deposit guarantee scheme. Raisin, secondly, makes it easier to shop around for the best rates and best accounts across different European banks.
Ultimately, it's advantageous to maximise your risk-free rate by opening a savings account with a bank that has its deposit guarantee scheme in a country you believe is reliable for enforcing the deposit guarantee scheme. By exploring options beyond traditional Dutch banks, diversifying savings across Europe, and leveraging platforms like Raisin, individuals can navigate the evolving financial landscape effectively, securing their financial futures with higher risk free rates. Download our app Figy, to monitor your entire wealth building journey from one single location, and make sure to add your newly opened savings account.
Depending on the country in which you open a savings account, different tax implications may apply, for example when you are living in the Netherlands. It's advantageous to open a savings account in a country that has no additional tax implications in comparison to opening an account in the country you are living in. Raisin has dedicated a webpage to this for people living in the Netherlands here.
