Financial Literacy And Savings Account Returns

Florian Deuflhard

Goethe University Frankfurt

Dimitris Georgarakos

Deutsche Bundesbank – Economic Research Centre; University of Leicester; Center for Financial Studies (CFS)

Roman Inderst

Goethe University Frankfurt

June 2015

Netspar Discussion Paper No. 06/2015-036


Savings accounts are owned by most households, but little is known about the performance of households’ investments. We create a unique dataset by matching information on individual savings accounts from the DNB Household Survey with market data on account-specific interest rates and characteristics. We document heterogeneity in returns across households, which can be partly explained by financial sophistication. A one-standard deviation increase in financial literacy is associated with a 12% increase compared to the median interest rate. We isolate the usage of modern technology (online accounts) as one channel through which financial literacy has a positive association with returns.

Financial Literacy And Savings Account Returns – Introduction

Savings accounts typically represent the most common vehicle for household financial investment. In the DNB Household Survey (DHS) savings accounts are owned by 82% of all Dutch households and make up the largest part of their financial wealth (with an average share of 43%).1 This contrasts with much lower ownership rates of funds or directly held stocks.2 Still, while there exists a large literature documenting how households invest in funds and stocks and how these investments perform, much less is known about savings accounts. We make use of the fact that the DHS reports bank and account names for each savings account owned by a household member, as well as the respective invested amount. This information allows us to match individual accounts held by households in the DHS with market data on interest rates and a set of account characteristics.

We document considerable heterogeneity in returns across households for such a widely held and virtually riskless asset. To understand such a difference in performance of what seems to be a relatively simple financial product, our study first points to characteristics of the market and products. There is a wide dispersion of interest rates across products even for the same invested amount. A comparison of individual products is also not straightforward, e.g., as accounts differ in the applicable amount thresholds to earn a higher interest rate as well as in additional restrictions. Notably, this variation is not due to so-called “teaser rates” that are paid when an account is newly opened or when fresh money is transferred, as these rates are not considered in the analysis. The difference in account characteristics, for which we can control, and the variety of offers in the market suggest, in particular, a role for financial sophistication as an explanation for the observed heterogeneity in returns.

This paper is the first, to our knowledge, to show that heterogeneity in returns of a widely held asset such as savings accounts is partly linked to investor financial literacy. We recover measures of financial literacy from a special module of questions that was part of the 2005 wave of the DHS.3 Even after accounting for a range of socio-economic characteristics, account characteristics, as well as amount invested, we find that financial literacy has a significant relationship with households’ individual returns on savings accounts: a one-standard deviation higher advanced financial literacy is associated with an approximately 29 basis points higher interest rate, which represents an increase of 12% compared to the median interest rate of 2.5%. We also calculate the gains from moving a household in the lowest literacy quartile to the highest literacy quartile. Applying the estimated gains of literacy to the average savings volume and projecting this over 10 years, total gains in real terms would accumulate to €838.

Our investigation of products and the market suggests that lack of information may prevent households from securing the highest possible interest rate for the invested amount.4 Even at a given bank, households may not choose the most preferable offer. In fact, one such channel that we can isolate is the ability and willingness (or the lack of it) to use a higher interest bearing online account. We also find some evidence to suggest that more literate households might be better able to identify accounts across banks that for a given volume and a given set of characteristics offer the highest return. From banks’ perspective, lack of knowledge and sophistication are in fact prerequisites to uphold price dispersion across banks as well as price discrimination across accounts.

Financial Literacy

Financial Literacy

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