Saving money at a bank often yields low interest. Perhaps that's the reason you started investing or are considering it. However, investing also comes with risks, and that may not be appealing to everyone. Do you find the risks rather daunting? Or do you have a short investment horizon and prefer not to take much risk? Then the Peaks Interest Account might be for you: an investment account with low risk that generates more interest than most savings accounts. Below, we'll explain how the Peaks Interest Account works, so you can better decide if it suits you.
Not all interest rates are the same
First, let's have a closer look at the term "interest." There are quite a few types of "interest," and it can be challenging to keep them all straight. To understand how the Peaks Interest Account works, you need to understand the details of these three interest types:
1. "Interest" from the European Central Bank
When you read in the news that central banks are raising or lowering "interest", they are adjusting the interest rate at which banks can deposit money with them: the deposit rate. If the deposit rate of the ECB changes, the interest on your savings account does not immediately increase or decrease, but does so with a delay.
2. €STR: the short-term interest rate between banks
Then there's the interest rate that "normal" European banks charge each other when they deposit money with each other. They do this continuously and for various periods, using different interest rates. Sometimes, the term is extremely short, just overnight. In that case, they use the "Euro short-term rate" or "€STR": the short-term interest rate in euros. This rate is close to the ECB's deposit rate and also moves with it.
3. Savings interest: the interest on your savings account
Savings interest is the interest that your bank pays on the money you've deposited with them. The bank uses your savings to provide loans, such as mortgages or credits to businesses. The interest you receive is, in essence, compensation for your savings. The difference between the interest you receive on your savings account and the interest the bank earns on the loans they have provided is the bank's profit ("interest margin").
If central banks increase the deposit rate, "normal" banks also raise the interest rates for borrowing and saving. However, this doesn't happen in a one-to-one ratio: often, the savings interest lags behind the deposit rate. As a saver, you then receive a lower interest rate than what the central bank receives when it deposits money somewhere. This is because the loans the bank has outstanding often have longer terms, and the interest is fixed for a longer period.
The Peaks Interest Account follows the €STR rate
While you receive savings interest on your savings account, on the Peaks Interest Account, you receive the €STR rate plus 0.085%. This is possible because you don't directly deposit your money with a bank but invest in a money market ETF. This ETF deposits your money with Deutsche Bank and receives the €STR rate + 0.085% in return. That interest, minus the fund costs and variable Peaks fees, is then credited to your Peaks Interest Account. The image below illustrates how the structure works:
The money market ETF in which you invest through Peaks is managed by DWS - one of the largest asset managers in Europe. DWS deposits your money with Deutsche Bank, which pays the €STR rate + 0.085% to the ETF. Naturally, Deutsche Bank handles your money carefully. Furthermore, Deutsche Bank must ensure that they can always return your money when requested by DWS or you (via Peaks).
Bonds protect your money
It is possible for Deutsche Bank to go bankrupt. The probability of this happening is very small. However, it remains a risk, and to cover it as much as possible, DWS receives bonds from Deutsche Bank as collateral. These bonds are worth the same as the money in the ETF, and DWS verifies this daily. If the daily check reveals that the collateral is worth less, Deutsche Bank must provide additional bonds to the ETF, equal to the shortfall, until the two values are equal again.
In the event that Deutsche Bank goes bankrupt, the fund can use the bonds to enter into a new agreement with another bank or sell the bonds to repay investors. This way, the collateral reduces the risk of losing (part of) your investment. The issuer of the fund, Xtrackers, assesses the fund risk as very low: risk level 1 on a scale of 7, where 7 is the highest risk category and 1 is the lowest.
The Risks of the Interest Account
The likelihood of Deutsche Bank going bankrupt is very small: it holds an A-rating from the two major credit rating agencies, S&P and Moody's, and the probability of Deutsche Bank defaulting within 12 months is estimated at 0.08%. And even if it does happen, DWS still has the bonds.
What can happen, however, is that due to Deutsche Bank's bankruptcy, those bonds may decrease in value. Upon sale, they may yield less than the money invested in the ETF. This means you could potentially lose a portion of your investments. It's a small risk, but theoretically possible.
Another risk is that the ECB lowers interest rates to a level below 0% - and since the €STR follows the ECB rate, it could also go below 0%. In that case, your Peaks Interest Account would not yield much.
The likelihood of negative interest rates is small but possible. In recent years, the €STR rate has been negative due to the ECB lowering rates below 0%. If that were to happen again, you can easily withdraw the money from your Peaks Interest Account or invest it in another way through Peaks, without any transaction fees. It's worth noting that interest rates are usually lowered gradually, rather than all at once.
As a saver, you also face risks
In principle, the bank where you save can go bankrupt. Through the Deposit Guarantee Scheme, your money is insured up to an amount of €100,000. This guarantee does not apply to amounts exceeding €100,000.
With the Peaks Interest Account, you cannot rely on the Deposit Guarantee Scheme: here, the structure with the bond collateral provides additional protection. The collateral covers the total value of your investments, even if it exceeds €100,000.
So, what kind of account is the Peaks Interest Account?
The Peaks Interest Account is an investment account with low risk. You earn the €STR rate (+ 0.085%) on the amount in your Interest Account: the short-term rate that banks pay each other when they deposit money with each other, which is higher than the savings rate.
However, this rate is subject to deduction of fund costs (0.10%) and variable Peaks fees (depending on your package). Your money is held by Deutsche Bank and protected by bonds that serve as collateral.
If you have any questions about the Peaks Interest Account, feel free to ask! Our customer service is available to assist you (on weekdays between 9:00 am and 6:00 pm). Alternatively, you can check the frequently asked questions, as yours might already be answered there.
Please note: This article is not intended as personal investment advice to you, but as an explanation of the Peaks Interest Account. Be aware that investing always carries risks, and you may potentially lose (a portion of) your investment.