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A simpler place for your money. No transaction fees. Higher interest rates. No extra fees when traveling. Take part in shaping indó.

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Most of us use debit or credit cards to pay for products and services in our
daily lives. Those cards are most likely issued by our bank, whether it is the
good old plastic card or a smart phone version such as Apple Pay. What I would
like to know is just how much it costs me, at the end of the day, to use a card
to pay for every day things, such as food, entertainment and travel. In other
words, how much am I charged for using my money?
To be fair, most of us probably do not know what this cost is, although we have
a feeling that the banks charge us all kinds of hefty fees. We all have
different ways of using bank accounts and cards, some of us use debit cards
exclusively as well as our salary account, some of us primarily use credit cards
and then settle them at the end of the month, while others might use a mix of
these, or even exclusively cash.
The Central Bank of Iceland gathers all kinds of information about card usage
and Icelandic bank accounts and there we have a wealth of data<a href="#user-content-fn-1" id="user-content-fnref-1" data-footnote-ref aria-describedby="footnote-label">1</a>. Looking at
the numbers we see that over the course of the last 12 months, Icelandic
households have bought goods and services, using debit cards, for ISK 490
billion, and of those around ISK 65 billion were spent abroad (including foreign
online purchases). In the same period, Icelandic households spent ISK 570
billion using credit cards, thereof ISK 100 billion abroad. The total spending
of Icelandic households for the last year was thus around ISK 1.100 billion.
At the end of March 2022, Icelandic households had, combined, around ISK 225
billion on their current accounts (usually linked to debit cards), and
additionally almost ISK 450 billion in savings accounts that offered withdrawal
without notice, based on the same Central bank data.
These figures are so large that most of us can hardly comprehend them, and
therefore it is helpful to look at them as an average for every person in
Iceland 18 years or older (keep in mind that averages are one thing, the
distribution is another matter entirely, but we lack the data for that). We see
that the “typical, average” Icelander has around ISK 770.000 on his current
account at the end of the month. Lindsay, a hypothetical Icelander, represents
this “typical, average” person - the data portrayed by the Central bank. Most of
us will find ourselves with a higher or lower amount on our account, we might
use our cards more frequently or more seldom, but the averages are there
nonetheless. Lindsay is thus a perfect average, typical person in this respect.
Icelandic banks charge fees for card usage as per their pricing schedule, but
for the sake of simplicity, let's assume that Lindsay pays an annual fee,
transaction fees and sometimes buys products online from foreign stores (such as
Boozt or Amazon), as the Central bank data suggests.
The banks offer all kinds of cards with different features, as one might expect,
and (again) for the case of simplicity let's assume that Lindsay has a card the
banks usually refer to as a “gold” card, that is not the cheapest option and not
the most expensive one.
<img src="/blog-cost-using-debit-card.jpg" alt="Example calculations for a debit card" class="inline-right" width="400">
If Lindsay uses the card for daily consumption and has the average amount on the
current account, that amount accrues interest, but at the same time Lindsay has
to pay all kinds of fees and even hidden chargers, so in the end the cost for
Lindsay is around ISK 12.500 per year. Lindsay pays more than one thousand
krónur per month for accessing the money and using the card.
What Lindsay does not easily see is the transaction cost and annual fee to be
paid. Those are around ISK 6.300 per year and in addition to that, Lindsay pays
almost ISK 7.000 per year in for a worse exchange rate than normal.
In this case, it makes no difference whether Lindsay uses a plastic card, Apple
Pay or pays online - all transactions are transactions in the same sense.
Let us further assume that Lindsay uses a credit card rather than a debit card,
to avoid those pesky transaction fees because those are not charged from credit
card transactions. Assuming the consumption is completely the same, we see that
Lindsay has very similar costs, despite no transaction fees - they have been
replaced by cryptic processing fees charged for showing Lindsay a summary of the
monthly transactions on the computer.
<img src="/blog-cost-using-credit-card.jpg" alt="Reiknidæmi fyrir kreditkort" class="inline-left" width="400">
The annual fee for a credit card can be significantly higher than the shown
example (tens of thousands of krónur per year even), but to be fair, there are
also many perks associated with those cards such as insurance, discounts and
more. While the processing fee has replaced the transaction fee, the FX premium
has not changed.
Lindsay has, despite all this, saved around ISK 1.500 krónur per year and the
cost of having a credit card and current account is around ISK 11.000 krónur per
year instead of ISK 12.500 krónur per year using the debit card.
Some readers might have a “system” in place to get around these costs, such as
moving money around different accounts to find the higher rates, using cash to a
significant degree etc. But the question remains, why should I be paying all
these fees just for being able to use my own money? It is, after all, my money!
And why do I have to go through all kinds of exercises every month to reduce
this cost? Why can't the bank just give me a fair deal?
Now let's assume that there are 290 thousand Icelanders just like Lindsay.
Those people pay, collectively, around ISK 3,5-4,0 billion per year, just to be
able to access their salaries to buy everyday things. I assume that Icelandic
ouseholds could do quite a lot with that kind of money.
<section data-footnotes class="footnotes"><h2 id="footnote-label" class="sr-only"><a aria-hidden="true" tabindex="-1" href="#footnote-label"></a>Footnotes</h2>
<ol>
<li id="user-content-fn-1">
<a href="https://www.sedlabanki.is/hagtolur/talnaefni/">https://www.sedlabanki.is/hagtolur/talnaefni/</a> <a href="#user-content-fnref-1" data-footnote-backref class="data-footnote-backref" aria-label="Back to content">↩</a>
</li>
</ol>
</section>

How much am I paying for using my money?

Neobank. When most people hear this word, they think “new bank” which is a
decent understanding of what a neobank is. Nonetheless, this word hasn’t been
used much in Iceland, maybe because no new bank has been started in Iceland the
last 50 years or so.
Even if the word neobank is easy to understand, we can be a little more specific
about what this means than just saying it’s a new bank. At indó, we feel that
the word neobank is a company that:
provides the banking services people expect but dares to be different the big
old banks in ways that matter to customers has a strong focus on customer needs
and makes products and services that solve real problems is fully transparent on
fee’s customers pay and why they pay them. A neobank isn’t part of the old
pricing club where most banking products just cost pretty much the same,
irrespective of which bank you go to
We could carry on, but these three aspects cover pretty well what we feel
matters. Neobanks are different than old banks in good ways, they really focus
on their customers and they’re not part an existing banking legacy.
If we look abroad, a number of neobanks have been created in Europe and
elsewhere. Another term often used for a neobank is “challenger bank”. We almost
think this is a better word than neobank. The founders of these banks decided to
challenge the old banks and compete for their customers. In most cases this is a
battle of David and Goliath, where the old banks are large, rich and deeply
ingrained into the inner workings of national societies. At the same time
challenger banks are small, quick and full of people that strongly believe in
what they are doing and want to be part of changing the system to benefit
customers.
In the Nordics, a number of challenger banks have already been founded. In
Sweden you have Klarna that transformed into a challenger bank through a banking
licence in 2018, in Denmark you have Lunar that has grown and gone international
during the last few years and besides those you have a number of smaller
challenger banks like Rocker, PFC and Instabank.
Sometimes these challenger banks started offering financial products that
weren’t regulated but then decided to challenge the old banks through getting a
banking licence and starting to take deposits. These Nordic neobanks combined
have millions of happy customers and are part of changing the Nordic banking
environment for the better.
During 2014-16 there was a lot of innovation in the United Kingdom’s financial
system and the challenger banks Monzo, Starling and Revolut came into existence.
They have grown massively since they were founded and are strong alternatives to
the old UK banks. Combined they internationally have about 25 million customers
which is pretty impresssive. They’ve made people in the UK more aware of the
fee’s they’ve been paying banks, for example when using their cards abroad.
We’ll do the same but in our own indó way.
To sum up, neobanks are here to stay and this year Iceland will get its first
neobank in the shape of indó. We intend to be different then the old banks, have
strong focus on solving our customers problems and be as transparent as we
possibly can. We intend to challenge the old banks and create a company that
people will be happy to move their banking business to.
We want to listen to our customers, and if you have ideas, thoughts or maybe
just words of encouragement send us some good ideas through our <a href="/en/ideas">ideas page</a>.

What is a neobank?

Most of us have bank accounts, whether they are so-called “current accounts”
linked to our debet cards and, sometimes, overdraft, or savings accounts.
The interest rates the banks pay us usually don’t get as much attention as the
interest rates we have to pay the banks. When we put our money into a salary
account, or a savings account, we are effectively lending the bank our money,
and the banks should of course pay us fair and normal rates for those loans,
just as they expect us to pay them fair and normal interest rates on the loans
they have extended to us.
The Central bank of Iceland has a lot of data about the Icelandic banks, and
there we can see that Icelandic households have around SK 225 billion,
collectively, on the current accounts with the local banks<a href="#user-content-fn-1" id="user-content-fnref-1" data-footnote-ref aria-describedby="footnote-label">1</a>. That means that
if households were just a single customer of a bank, that person would have ISK
225 billion on its debet card at the end of each month. The rates the banks pay
on that deposit ranges from 0,05% - 0,20% per year, according to the price
schedules of the banks.
The banks have to do something with this money, and if we look at how much money
the banks, themselves, lend to the Central bank (they basically deposit money at
the Central bank just as we deposit money with our bank), that amount is around
ISK 235 billion<a href="#user-content-fn-2" id="user-content-fnref-2" data-footnote-ref aria-describedby="footnote-label">2</a>.
We can generalize a bit and state that the money Icelandic households keep on
their current accounts is, by and large, immediately placed by the banks into
their own accounts with the Central bank (the figures suggest this, and also the
nature of these types of bank accounts from a bank-ish perspective). The banks
thus keep our spending money at the Central bank, on their own bank accounts
there.
The Central bank offers two types of bank accounts to banks, a current account
and a “savings account” where the funds are “locked in” for a week at a time.
The Central bank then pays the banks a specific interest rate on those deposits,
as it should. The rates the Central bank pays for money on its savings account
is called the Main rate, and is currently at 3,75%, and pays 3,50% on its
current account offered to the banks.
<img src="/blogg-vaxtamynd-en.png" alt="Útskýringarmynd um vaxtamun viðskiptabanka">
What the picture above shows us is that Icelandic households place ISK 225
billion with the Icelandic banks, who in turn place the same billions with the
Central bank in their own name. The banks get paid just shy of ISK 7,9 billion
in interest per year on those deposits, but pay the households only ISK 270
million in interest. In other words, the banks pocket 97% of the interest rates
they receive on the spending money of households, and give the owner of the
money, us, 3% of the interest.
Based on the above, we can state that the only thing the banks do with our
spending money is to move it to the Central bank, where it sits risk free until
we need to use it. Money on current accounts is notoriously tricky to use for
lending to bank customers, for that more “sticky” funding is needed such as term
deposits (or deposits that are locked in for weeks, months or years), equity,
bonds and such. Our deposits are effectively kept at the Central bank, but we
only get a small fraction of the interests they receive.
If we look back a few years and investigate how interest rates have gone up and
down, we see that the banks are very efficient in raising their lending rates
when the Central bank changes its own rates (and to be fair, they lower them
efficiently as well when the Central bank is lowering its rates). Below, to the
left, we see that typical overdraft rates from the beginning of 2018 to the end
of April 2022, in addition to the Central bank Main rate and typical interest
rates on a household current account.
<img src="/blogg-vaxtamynd-2.png" alt="Graf yfir innlánsvexti og meginvexti Seðlabanka Íslands">
When the Central bank started to lower its rates in the beginning of 2019,
interest rates on both overdrafts and current accounts available to households
went down, and indeed the rates on current accounts went almost down to 0%,
ranging from 0%-0,1%. When the Central bank started to raise its rates again in
the middle of 2021, overdraft rates went up at the same time (it became more
expensive for households to borrow, not just an overdraft but all types of
loans), the rates on the current accounts moved next to nothing, if at all.
The above right image shows a “zoom in” of the left image, with only the Central
bank main rates and the typical current account rate available to households.
Households have not seen an increase in their current account rates since the
middle of 2019 despite the Central bank having raised its rate considerably
since then.
This raises a few questions. Firstly, why don’t Icelandic households get a much
higher rate on their money held in current accounts with the banks, since the
money is, after all, held at the Central bank in the name of the banks? If our
money carries 3,75% interest, or thereabouts, when it is at the Central bank,
why don’t we get much higher rates when the money is at our bank? The bank
can’t use this money for much else anyway than keep it with the Central bank.
Secondly, why don’t the rates on my current account change then the Central bank
raises its rates? When the Central bank changes its rates, is it normal that
the banks raise the rates on our loans almost simultaneously, but little or
nothing happens to our savings rates?
Of course it should be normal for banks and their customers to split the
interest rates received by the Central bank, but it cannot be normal that the
split is 97 to 3 in favor of the banks.
Let us assume that the split was, instead, 50 / 50, that is to say the banks
kept 50% of the interests the Central bank pays, and the households 50%. That
would mean that, with the current Main rate at the Central bank, Icelandic
households would have just over ISK 3,5 billion more to spend per year than they
currently do.
<section data-footnotes class="footnotes"><h2 id="footnote-label" class="sr-only"><a aria-hidden="true" tabindex="-1" href="#footnote-label"></a>Footnotes</h2>
<ol>
<li id="user-content-fn-1">
<a href="https://www.sedlabanki.is/hagtolur/nanar/2022/04/25/Bankakerfi/?stdID=9">https://www.sedlabanki.is/hagtolur/nanar/2022/04/25/Bankakerfi/?stdID=9</a> <a href="#user-content-fnref-1" data-footnote-backref class="data-footnote-backref" aria-label="Back to content">↩</a>
</li>
<li id="user-content-fn-2">
<a href="https://www.sedlabanki.is/hagtolur/nanar/2022/05/06/Efnahagur-Sedlabanka-Islands/?stdID=10">https://www.sedlabanki.is/hagtolur/nanar/2022/05/06/Efnahagur-Sedlabanka-Islands/?stdID=10</a> <a href="#user-content-fnref-2" data-footnote-backref class="data-footnote-backref" aria-label="Back to content">↩</a>
</li>
</ol>
</section>

Why are the interest rates on my salary account so low?