Should you be earning more on your savings?

High interest savings accounts are undoubtedly an important and valuable investment option for many seniors.

However, an inquiry by the corporate watchdog has confirmed that we need to pay attention to the small print when comparing products.

The Australian Competition and Consumer Commission (ACCC) has concluded that some of us are missing out on earning higher interest on our savings due to ongoing barriers to searching for, and switching between, retail deposit products.

The Retail Deposits Inquiry Final Report found that banks use strategic pricing for retail deposit products, including introductory and bonus interest rates, and a range of fees and charges. This creates complexity and makes it difficult for consumers to compare products not just between banks but within the same bank.

The ACCC 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.

A considerable amount of savings is at stake. Consumers depend on retail deposit products such as savings accounts and term deposits, to safely store over $1.4 trillion of their savings, conduct their everyday banking, and importantly to earn a decent return on these funds.

“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,” ACCC Chair Gina Cass-Gottlieb said.

The report recommends:

• That banks be required to tell customers when they change their interest rates, and prompt them to consider switching to a better rate.

• Banks alert their customers if they are about to lose entitlements to their bonus interest, for example by withdrawing too much or too often in a given month.

• The federal government further consider bank account portability which would have the potential to build on recent reforms and greatly enhance the capacity for consumers to switch between products and banks.

“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,” Ms Cass-Gottlieb said.

The ACCC says bank account portability could greatly simplify switching and taking advantage of better rates.

“This would not only improve outcomes for Australian consumers, but help drive competition between banks for retail deposits,” Ms Cass-Gottlieb said.

In its report, the ACCC found that banks rely on retail deposits for close to 30% of their funding needs on average, and some banks, such as mutual banks, are more dependent on retail deposits than others.

Interest paid to customers on their deposits is, therefore, a significant cost, which banks try to minimise. 

The Reserve Bank of Australia’s cash rate target is an important influence over interest rates throughout the economy. However, the report notes that banks also consider their broader funding requirements, profitability, economic and regulatory factors, likely customer responses, and the competitive landscape when setting their deposit interest rates. 

As a result, the interest rates consumers receive on deposits do not automatically follow movements in the RBA’s cash rate target.

Further, interest rates for the same type of retail deposit product can vary significantly between, and sometimes within, banks due to strategic pricing at the product and individual customer level.  

All of these factors make retail deposit rates opaque and add complexity for consumers engaging in the market. 

While offers of bonus and introductory interest rates are commonly used by banks to attract customers, the ACCC noted that consumers often do not receive bonus interest and may be better off with other products. 

In the first six months of 2023, an average of 71% of bonus interest accounts did not receive bonus interest in any given month. 

The ACCC noted that with one bank’s bonus interest account, a customer who starts with $5,000 and adds $200 per month could earn about $328 in interest over a 12-month period if they met the bonus conditions each month and received the headline rate of 5.25% pa. 

However, this drops to only $18 if they failed to meet the bonus conditions throughout, meaning they would only receive the base interest rate of 0.30% pa. 

This low base interest rate compares to the bank’s unconditional saving account rate of 3.75% p.a., which would return interest of $232 over a year. 

“Consumers can find the complexity of the pricing of retail deposit products overwhelming,” Ms Cass-Gottlieb said. 

“While comparison websites can offer information across different banks and products, the results consumers see and the way they are ranked can be influenced by commercial arrangements.

“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.” 

Source: ACCC Media Release