Interest rate changes and savings & investment products
Discussion
I have an interview this week with a company providing savings and investment products for which I need to prepare a presentation. Although I have some Financial Services experience, I don’t have any experience of these specific products. The question I have is around the impact of changes in interest rates on the business model/profitability of savings and investment products. A rise in interest rates generally leads to a rise in rates offered to customers on savings products, but does this also create scope for some additional margin for the provider, or is it not that simple? Any insight very much appreciated!
Generally no.
They make money on the spread.
e.g. they borrow at LIBOR and lend at LIBOR + 1ppt.
The 1ppt is fixed and is their income.
So as LIBOR changes it makes no difference to the lender - just to the borrower.
Obviously higher rates will have other implications for the overall economy but ceteris paribus that's what should happen to income for the savings product.
They make money on the spread.
e.g. they borrow at LIBOR and lend at LIBOR + 1ppt.
The 1ppt is fixed and is their income.
So as LIBOR changes it makes no difference to the lender - just to the borrower.
Obviously higher rates will have other implications for the overall economy but ceteris paribus that's what should happen to income for the savings product.
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