How bespoke investments drive bank revenues


Banks typically raise funding by accepting deposits from customers, securing short-term borrowing on the money market or issuing corporate bonds. Of these three sources, deposits provide a stable supply of funds that tend to be a cheaper alternative to the money markets and corporate bonds, so it’s no surprise that banks prioritize this form of funding.

Deposits also provide the bulk of funding for lending. The greater the volume of deposits, the higher the net interest margin (NIM, the difference between the interest charged to borrowers and paid to depositors) banks can earn. While interest rates at record lows since the 2008 financial crisis have driven down NIM across the industry, it remains an important source of revenue, not to mention a key profit metric.

Adding bespoke investments to a bank’s product range is one way of driving deposits. Banks issue bespoke investments in either a security wrapper or a deposit wrapper.

Issuing security wrappers is expensive and requires the kind of infrastructure limited to bigger banks with a capital markets division like Barclays and investment banks such as Deutsche Bank.

However, Futora has developed a solution which allows smaller banks to issue their own bespoke investments through a deposit wrapper. Customers deposit funds, but instead of paying interest, the bank uses the funding to buy exposure to an underlying asset like an equity, commodity or currency. If the value of the asset rises, the customer earns a return, while also benefiting from the peace of mind offered by capital protection.


 

The direct and indirect benefits of bespoke investments

From the bank’s perspective, a bigger pool of deposits increases the volume of funds it can lend to borrowers and consequently boosts its net interest margin. But there are indirect benefits too.

As we highlighted in this blog post published in January, personalization is one of the hottest trends in financial services. Customers have become accustomed to the experience delivered by apps such as Amazon, and they expect the same from financial institutions. The next generation of digital banks have risen to the challenge, and if the incumbents want to stop losing market share to these innovative rivals, they must too.

Bespoke investments also enhance a bank’s profits by expanding its product range. A broader product range attracts new customers, while strengthening brand loyalty among existing customers and increasing the share of wallet by creating opportunities to upsell and cross-sell.

We’ve witnessed the tangible effect bespoke investments can have on a financial institution’s profits through one of our early clients, a global bank headquartered in the Middle East which generated annual revenue of just under $11 billion in 2021. The client launched Futora’s solution in 2020 with products offering exposure to both single assets and a basket of assets with timeframes ranging from just one year to three years and longer. The client reported that deploying our solution helped it increase its market share by 13% and improved its customer satisfaction rating by 37%.

To find out how adding bespoke investments to your bank’s product range can boost revenue, arrange a demo today.