As banks adjust interest rates at 1.25%, fintechs see mixed signal

In compliance with the recent Central Bank of Nigeria (CBN) guideline, some Nigerian banks sent an email last week Friday informing customers of adjustments to interest rates on deposits to 1.25 percent from 3.5 percent.

The CBN had directed all deposit money banks that effective Tuesday, September 1, 2020 interest on local currency savings deposits shall be negotiable subject to a minimum of 10 percent per annum of Monetary Policy Rate (MPR). This takes the savings interest rate from 3.9 percent to 1.25 percent per annum and 0.104 percent per month which the bank customer gets if he or she has not withdrawn from the savings deposit more than three times a month.

The goal of the directive is to divert liquidity away from risk-free instruments to the real sector. The new interest rate policy means lower cost of funds for deposit money banks, higher inflation rate, and dampened depositors’ savings appetite.

Many people expect fintech companies to gear up for an exodus of bank savers looking for more profitable platforms to stash their money. But some founders say they see a mixed signal.

“It is good news for the banks because now they have a legal framework to give their users lower interest rates,” Razaq Ahmed, co-founder, and CEO of Cowrywise, an online savings platform, told BusinessDay. “It is bad news for their users because even though the interest rates they were getting originally were not anything to be excited about, it is even much more depressed now.”

He says the impact on his company will be relatively positive. Cowrywise recently reduced the interest rate it offers savers on its platform following the impact of the COVID-19 on assets. But the current rate at about 6 percent is still considerably higher than what the banks are offering.

Cowrywise will maintain its strategy, the same for Carbon, a digital banking platform. Unlike Cowrywise, Carbon invests its savings in loans which used to be its core business when it was known as Paylater.

Chijioke Dozie, co-founder and CEO of Carbon agrees with Ahmed that it is not all-out good news especially for digital savings platforms.

“I think for fintech companies the challenge is going to be that the spreads will diminish a bit. When some of these savings companies started two-three years ago there was an opportunity to create arbitrage because t-bills were quite high but now t-bills are not so high so if you are promising your consumers 10 percent, you can’t get that from t-bills today. 2015-2016 when a lot of savings platforms were there we were living in an era where t-bills were around 13 percent and 15 percent,” Dozie said.

Some fintech firms are also investing in foreign stocks, especially in big tech companies like Tesla, Zoom, Amazon,  etc., which has seen growth since the COVID-19 lockdown began. The returns from some of the companies in recent times have not been as anticipated as lockdown has eased leading to a drop in the value of stocks around the world.

“Losing hella money on Tesla,” Odun Eweniyi, co-founder of Piggyvest tweeted on Tuesday. For companies like Cowrywise holding faith with Nigerian mutual funds, there is the matter of who makes the most money.

Ahmed says it has become a game of which fund manager offers the best returns relative to what the market offers. Cowrywise funds are in different investment instruments including mutual funds.

“From the mutual funds’ point of view, we have a lot of fund managers who currently deliver better returns than 1.2 percent that the banks will offer on deposit. Overall it makes money market mutual funds, especially for those money market mutual funds that have interest rates or yields around 5 to 6 percent, much more attractive. So we might see some inflow into those funds at this moment,” Ahmed said.

The long term trend however depends on how the interest rate environment moves. It might even be much more devastating for bank customers if the CBN decides to reduce the MPR at 12.5 percent currently. It would mean interest rates banks are legally allowed to give is further reduced.