Interest rates are hot news these days and, like clockwork, for every official Reserve Bank of Australia rate rise, the big banks raise their interest rates on loans within days.
However, not so the interest they pay on deposits. In fact, in most instances, there is no increase, unless you change banks or banking products.
It’s frustrating, and in February the federal government directed the Australian Competition and Consumer Commission (ACCC) to launch an inquiry into how banks set interest rates for savers, including differences in interest rate rises between bank deposits and home loans.
The final report was released last week. The ACCC found consumers are missing out on earning higher interest on their savings due to barriers to searching for, and switching between, retail deposit products.
Strategic pricing
The report also found that banks use ‘strategic pricing’ for savings, including introductory and bonus interest rates, and a range of fees and charges, which makes it difficult for consumers to compare products.
Banks are also ‘segmenting’ customers, making different products and interest rates for comparable products, even within the same bank.
“Our report has recommended measures to make it easier for customers to get the most out of their savings and move to retail deposit products that better meet their needs,” said ACCC chair Gina Cass-Gottlieb.
We’re not talking about a tidy little nest egg here. And forget figures in the billions. Australians have $1.4 trillion of their money in savings accounts and term deposits.
According to The Age, 89 per cent of those are kept with the big four banks – ANZ, NAB, Westpac and the Commonwealth – and the next smallest six institutions.
Our money, their business
And our money is a vital part of keeping those banks ticking over. The Age claims these savings provide about a third of all the money the banks use for their overall business.
As such, interest paid to those accounts represents a significant ‘cost’ to the banks, and it’s good business for them to keep that cost at a minimum.
The banks are also not just failing to pass on interest rates, they are making it onerous to meet conditions to receive any interest.
“While high headline interest rates may seem attractive to customers, they can come attached with conditions that are hard for customers to meet and keep track of,” Ms Cass-Gottlieb said.
“During our inquiry, we were concerned that several banks could not tell us how many of their customers had missed out on bonus interest, or which specific condition they failed to meet.”
The ACCC report found that in the first six months of 2023, on average 71 per cent of bonus interest accounts did not receive bonus interest in any given month.
Clearer communication
In one example, the ACCC outlined that for an account of $5000, which required $200 in payments each month, the owner could earn $328 in interest in 12 months. However, that figure could drop to $18 if they failed to meet the bonus conditions.
“It is important for consumers to be supported by clearer communication and information from banks and comparison websites, so they can receive the full value out of the products they are using,” Ms Cass-Gottlieb said.
As business entities, banks have influences other than the RBA interest rate as their default guide to setting interest rates. They also must take into account funding requirements, profitability, economic and regulatory factors and the competitive landscape when setting their rates.
However, before you think, ‘Hmm, well that seems fair’, they don’t seem to be doing it too tough.
According to the UNSW, the big four reported a record full-year profit of nearly $32.5 billion between them (up 12.4 per cent compared to the previous financial year). The Commonwealth Bank posted the largest profit ($10.2 billion) followed by NAB ($7.7 billion), ANZ ($7.4 billion) and Westpac ($7.195 billion), mostly due to an increase in their profit margin on loans.
But are we our own worst enemy?
UNSW Associate Professor Mark Humphery-Jenner says that while some people shop around, most Australians simply leave their money in a day-to-day account, which attracts low interest.
“In a perfect market, customers could simply take their money from a bank account, lend to the government risk-free at the cash rate, and earn more money,” said Assoc. Prof. Humphery-Jenner.
Fund manager fees
“But, this is typically an opaque process and can involve signing up to fund managers who earn large fees and can undermine the whole point of the process.
“People typically cannot simply log into their online trading platform and buy a government bond. Therefore, banks are slow to pass on RBA rate hikes to their depositors.”
However, Assoc. Prof. Humphery-Jenner says most people with a super account do indirectly benefit from interest rate rises as almost all large super companies hold ownership in the big banks and take a share in that profit.
He says institutions own around 23 per cent of the shares of ANZ and Westpac, 18 per cent of CBA, and 27.7 per cent of NAB and 27.5 per cent of Macquarie.
“Behind the institutional ownership is not a nameless faceless corporation, it is often ‘mum and dad’ investors,” he says.
Do you shop around for interest rates on your savings? Why or why not? Why not share your experience in the comments section below?
Also read: Super fund returns bounce back in November