“We have an advantage over banks”

The days of low interest rates are over. Since the European Central Bank (ECB) and its American counterpart, the Fed, raised interest rates last year, various providers have been outdoing each other with offers for overnight money and the like.

Who can pass on the interest to the customers the fastest? Neo-brokers who grew up with ETFs and stocks during the low interest rate era seem to be leaving their competitors behind. Most banks are reluctant to offer long-term interest rates. It has been their core business for centuries, while the novice brokers are geared towards investments.

Scalable Capital is one of the largest neo-brokers from Germany. Founded in 2014 by Erik Podzuweit, Florian Prucker, Adam French and Stefan Mittnik, the platform says it has over 600,000 customers in five European countries. We spoke to CEO Podzuweit about expectations, profits and market changes through interest.

t3n: Even though interest rates have just gone up again, inflation is higher than interest rates, so money is depreciating despite interest. What makes call money and co so attractive for customers anyway?

Eric Podzuweit: In the long run, nothing beats a broadly diversified stock portfolio. But I see three reasons why people are using the interest rate quotes instead, even though inflation is so high. They either only want to park it for a short time, aren’t yet comfortable exposing their money to stock volatility – unfortunately, many people still feel that way – or they would like to start investing in stocks but are waiting because the geopolitical situation unsettles them.

t3n: Interest rates are actually the business of banks. Recently, however, neo-brokers like you have also been taking part in the interest rate rally. How does that fit into your business model?

In fact, our customers receive the interest through our partner bank in the background. We are an investment platform. The offer fits in well with our claim of showing a whole range of systems. And that clearly includes interest again today.

We have a major advantage over traditional banks: we have fewer customer deposits. Long-established banks sometimes have large cash holdings from private and corporate customers, which can total hundreds of billions of euros. If they want to pay interest on these sums to existing customers, it will be quite expensive. The banks would rather lose five to ten percent of their customers per year and earn the full interest margin of over three percent.

t3n: You, on the other hand, have no old stocks and therefore no costs for them.

Exactly. And then there is the fact that banks do not leave their customer deposits, but do something with them. For example, buy government bonds or lend them as mortgage loans. In the worst case, the money is tied up in it for many years and only yields interest of less than one percent.

Many big banks also have interest rate offers, but these are mostly bait offers or only for new customers, for whom the bills from the banks are the same as for us neo-brokers.

t3n: But Scalable Capital also made a bait offer with a short-term interest rate of 3.5 percent in the summer, right?

Yes, that was a marketing move. But with us, customers do not fall back to 0 or 0.5 percent interest after the three-month term, as with many banks. But to 2.3 percent or soon even 2.6 percent. We have similar marketing campaigns from time to time. But you only keep people in the long term if they are really happy with the service, the interest rate and, above all, the overall package.

t3n: Are offers like this worth it for you?

It is worthwhile if a certain percentage of customers stay after the campaign and also invest in stocks and ETFs over the long term. If all users jumped off, that would be wasted marketing money for us. Things are looking good at the moment, but we can only take stock after three months.

t3n: In the interest business, you not only compete with other investment platforms, but also with banks. Are the lines between banks and neo-brokers now blurring?

Yes, we’ve always been striving for the same thing a bit more. But of course, banks have a much more diversified business, while our focus is on investing, which now also includes saving. But we are a long way from the offer of a major bank.

t3n: How are higher interest rates affecting the stock market?

Basically, rising interest rates are rather bad for the development of the stock market. It depends on the company’s future profits, future dividend payments and cash flows. The forecasts are already included in the share price. If interest rates are high, however, these future corporate profits will be worth less in ten years’ time than they are today. The technical term for this is discounting. As a result, when interest rates rise, share prices fall. This did not happen with the interest rate hikes in June and May because the stock market had already priced these rate hikes in.

t3n: What next rate hikes are market participants currently expecting?

The current market expectation is that the ECB will hike rates again by 0.25 percentage points at the end of July. Overall, the current level of interest rates will probably remain so until the middle or end of next year. If the ECB and Fed do exactly that, then stock prices shouldn’t go up or down much either.

t3n: What would happen if central banks did something unexpected?

If the central banks cut interest rates, the stocks would certainly jump up brutally. But if it rises not just 0.25 percentage points, but more – in other words, an unexpectedly aggressive interest rate policy – the stock market would suddenly drop.

t3n: Apart from price developments: What else has the relaxed interest rate policy of the past few years achieved?

Money has cost almost nothing in the past 10 to 15 years. This has led to a lot of liquidity in the market: Many prices are inflated and investors have invested a lot of capital. For example, in the crypto sector, many of the excesses of recent years such as NFT would not have existed if the money had cost something. But startups are also affected by the fact that investors are more cautious today.

t3n: How does that show up for you as a neo-broker when the stock market is tight?

It has a negative and a positive side. On the negative side, it is quite clear that our customers are now acting more hesitantly and less. Luckily we are bigger and better known. The majority of our customers have savings plans into which they continue to pay regardless of the news situation or stock prices. We don’t need any new funding either, because we managed very well with the last one.

t3n: And the positive side?

That is that competition among new investment platforms has greatly decreased. There are more or less only two really strong players left in Europe: Scalable Capital and Trade Republic. A few years ago there were three or four other small competitors in each European market with similar models. Not all of them went bankrupt, but they all have problems and have had to cut back on their marketing. And crypto providers with whom we compete for customers’ money also have problems.

t3n: Which players are hit the hardest by the current bad market situation?

In the case of startups and fintechs, this naturally affects those who are still young and small and whose business model is not yet established. Recently, we have even been offered other fintechs for sale more frequently.

t3n: How realistic is such a purchase for Scalable?

Rather unrealistic. There are interesting projects, but migrating customers and putting a lot of work into a merger would only be worthwhile for us if our number of customers also made a gigantic leap forward as a result. We are growing very well organically and today have more than 15 billion euros on our platform.