Internet bank challenges staid savings market

Kaupthing Edge says a lack of competition should help it prosper

An Icelandic bank is attempting to thaw out a lacklustre retail savings market by offering internet accounts with attractive interest rates to Swiss customers.

Observers believe the sector is in need of a competitive shake-up, but doubt whether the newcomer is big enough to force established banks to offer new deals to notoriously loyal clients.

Kaupthing Edge entered the Swiss retail banking sector with a bang this week, offering introductory interest rates far higher than those provided by existing high street competitors.

Savers stand to make four per cent interest on an instant access account in the first three months, dropping to three percent for the remainder of this year.

Kaupthing Edge then promises to match or better the Swiss National Bank overnight rate – usually around two and a half per cent. Swiss banks typically offer rates of around one per cent for savings accounts.

Fixed term deposits of six and 12 months also attract rates significantly higher than traditional Swiss rivals. Kaupthing Edge is able to support these offers because it is purely an internet service and does not carry the overheads of banks with high street branches.

Magnus Gudmundsson, chief executive of Kaupthing Luxembourg, said the lack of competition should help the new bank prosper.

“It surprised us how low the interest rates are in this market. Switzerland has an enormous number of banks and you would have assumed that there would be much more competition in the market, but there is less than in any other market,” he said.

Limited impact

Professor Martin Janssen of Zurich University’s Swiss Banking Institute believes the market is ripe for a shake-up. But he doubts that Kaupthing Edge is big enough to have much impact and sees no evidence of other internet services entering the market in the near future.

“There seems room for new competitors like [internet banks] ING or DAB to enter the market and pay 0.5 per cent per annum or even one per cent higher interest rates than existing banks,” he told swissinfo.

“Leading European internet banks, though, have surely analysed the situation in Switzerland carefully and have so far decided not to enter the market. The potential of making profits on saving accounts in a small country like Switzerland is probably just too small.”

He added that Swiss banks would be unlikely to raise their own interest rates in response because customers in Switzerland are notoriously loyal compared to countries such as Britain and the United States.

“It does not pay a bank to deviate too far from the average of other banks as it would hardly get new customers and it would have to pay higher interest rates to all existing customers, leading to a fall in overall profits,” Janssen said.

Credit rating

Savers would have to consider Kaupthing Edge’s low credit rating compared to the established Swiss banks, which means it has a relatively higher chance of going bust.

But Janssen pointed out that Swiss regulations would insure the first SFr30,000 ($29,400) of customers’ money, while Gudmundsson defended Kaupthing Edge’s record.

“People have to understand that we are not an Icelandic bank but a northern European bank. Some 70 per cent of our profits are earned outside of Iceland and this has diversified our activities,” Gudmundsson said.

swissinfo, Matthew Allen in Zurich

Kaupthing Edge

Kaupthing Edge has been Iceland’s largest bank since the merger of two smaller banks in 2003. Outside of Iceland it is known as Kaupthing Bank.

At the end of March this year it had 3,324 employees and total assets of €53.3 billion (SFr86.4 billion).

Kaupthing has operated in Geneva since 2002, offering private banking and asset management services, but has only recently been awarded a retail banking licence in Switzerland.

The internet banking service is being offered from its Swiss branch of Kaupthing Luxembourg.

It offers 3.25% interest rates on a six month fixed term account and 3.5% on a 12 month tied period. The introductory 4% interest rate on it instant access account lasts until September 1, 2008, falling to 3% until January 1, 2009. Rates will then track overnight SNB interest rates until the end of 2011.

The bank has rolled out a similar service in 10 European countries in the last seven months, attracting 150,000 customers.