It had to happen sooner or later: investors with a lot of cash on deposit are getting nothing, zip, nada on money deposited.
Unfortunately, Australia’s entry to the global group of non-paying banking institutions has been led by the neobank sector, the online-only institutions that had threatened to give the incumbent majors a run for their money earlier this year.
From this week Xinja, one of the best known of the new banks, has told customers it will not be paying anything on deposits above $150,000. Xinja and its peers such as Up, Volt and 86400 won widespread attention at the beginning of the year when they offered an average cash savings rate of 2.25 per cent, against 0.45 per cent at the big four banks.
In refusing to pay wealthier customers anything at all for holding their money, Xinja becomes an unlikely member of an international banking set that has included some of the top names in private banking, including UBS, Credit Suisse and Julius Baer.
The issue now for Australian bank customers is whether the wider banking system is heading in this direction of offering no interest for large savings on deposit — especially if the RBA were to cut the official cash rate further from its current level of 0.25 per cent, which on current money market settings is looking likely.
Australian cash depositors are currently getting less than 1 per cent on money on deposit across the banking system and at these levels it is becoming increasingly difficult for any bank to make a profit on cash products. Even long-term money is being offered at extremely low term deposit rates of below 1.55 per cent, when it was getting more than 2 per cent earlier in the year.
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Though difficult conditions are faced by all banks, Xinja is an exception, trading as an independent online bank that has not yet started a parallel lending business and as a result more cash on deposit is not an advantage.
Eric Wilson, the chief executive of Xinja Bank, has defended the move to a zero interest rate, suggesting: “We are not alone here. Several of our rivals in the neobank sector have effectively put caps on their rates.
“We made the change to protect the rates we are paying to the majority of our customers.”
Xinja also said it would be cutting its cash rate on amounts below $150,000 from 1.65 per cent to 1.5 per cent on its Stash accounts.
Rival neobank 86 400 (linked with Cuscal) is also reducing the attractions of its cash accounts for wealthier savers. It has told customers that the cut-off point for its standard 1.35 per cent cash rate that had been paid on cash up to $300,000 across three savings accounts will be lowered to $150,000 from November 1. Once a customer has more than $150,000 across their three savings accounts, the rate will drop to 0.1 per cent on its Save accounts.
Ironically, as rates continue to drop, many households are saving more often than they have for at least a decade. Households saved nearly a fifth of their income over the June quarter, as the saving rate jumped from near 7 per cent to almost 20 per cent.
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