Savings account traps: why billions of bucks are disappearing

Banks are pocketing billions of dollars extra because customers are confused by rules and restrictions on deposit accounts.

Aussie adults are losing an average $1500 per person every year through using the wrong savings accounts.

A new research paper by financial services technology company Upworth says consumers collectively miss out on about $30bn in interest annually, often because of confusing accounts, information overload or overconfidence.

It says cash deposits currently pay between 0 per cent and 5.75 per cent, and almost three-quarters of bonus interest savings accounts to not pay the bonus rate because savers don’t meet the conditions required.

Upworth’s research paper says there can be interest rate variations within the same bank “for no objective reason” and people should look beyond headline interest rates that are intentionally catchy.

“Complex product design makes it hard to compare products,” it says. “The headline interest rate is a very different concept from the effective interest rate an individual earns. Base rate, bonus rate and introductory rates all come in the mix.”

Upworth co-founder Maxime Chaury said people with deposits were lending money to their banks, and banks were trying to minimise their borrowing costs.

“One of the easiest ways to do this is to make their product offering confusing and have as many low interest rates savings accounts as possible, and as few high interest rates savings accounts,” he said.

“That increases the chances you will end up with a low interest rate account.”

Mr Chaury said people had psychological biases that resulted in them earning less interest.

These included overconfidence, loss aversion and preferring the status quo, he said, while information overload also played a role.

“When faced with too many options and an overload of information, we are typically overwhelmed,” Mr Chaury said.

“Rather than engage with complexity, we are likely to default to inaction.”

Mr Chaury said conditions attached to many accounts – such as minimum monthly deposits or limited withdrawals – could drastically reduce interest, while introductory interest rates were only temporary, typically three-to-six months.

“Banks know the vast majority of people will never change their savings account, despite the rate dropping significantly after the introductory period,” he said.

Upworth co-founders Maxime Chaury, centre, Carlos Rios, left, and Alexandre Chavotier. They have recently launched a free savings account scanner. Picture: Supplied

RateCity research director Sally Tindall said account complexity was “enough to trip even the savviest savers up from time to time”.

“But if you can get a handle on which type of savings account suits your finances and keep on top of what constitutes a competitive rate, you should be able to game the system rather than have the system game you,” she said.

“Savings rates are littered with fine print, designed to limit the amount of interest a bank has to pay its customers, from balance-based rate tiers, age minimums and maximums and monthly bonus rate conditions.

“There are millions of big bank online saver customers out there who signed up to an introductory rate five or 10 years ago, which gave them a sugar hit from a higher interest rate for the first few months or so, and have now been earning next to nothing for years because they haven’t been bothered to switch to a more competitive account.”

Ms Tindall said since interest rates started rising in mid-2022, the big four banks had allocated a greater proportion of Reserve Bank rate rises to their savings account bonus rates rather than the bases rates.

“The options available among savings accounts can feel overwhelming, but the one thing we are flush with is choice between the banks, and that’s a good thing,” she said. “At call savings accounts are one of the easiest financial products to switch.”

Originally published as Savings account traps: why billions of bucks are disappearing