By Shane Wright
Australians are being short-changed billions of dollars in interest on their $1.4 trillion in savings as banks deliberately woo new depositors at the expense of loyal customers, a damning report by the nation’s competition watchdog has found.
The Australian Competition and Consumer Commission (ACCC) has urged the federal government to consider making the movement of bank accounts as easy as retaining a mobile phone number, in a bid to increase competition across the banking sector.
Customers are missing out on interest on their savings. Credit: Dominic Lorrimer
The inquiry, ordered by Treasurer Jim Chalmers earlier this year, was prompted by complaints that while banks passed on increases in official interest rates to mortgage customers, interest rates on saving accounts did not change or changed much more slowly.
The ACCC said consumers were missing out on higher interest earnings because of what it described as “ongoing barriers to searching for, and switching between, retail deposit products”.
Even where good deposit rates were on offer, people missed out. While most banks offer bonus savings accounts, the inquiry found 71 per cent of such accounts did not receive any bonus interest through the first six months of this year.
“Although we have observed instances of price competition from smaller competitors seeking to grow their market share, there is little evidence of aggressive broad-scale price competition, particularly from larger banks,” it said.
“Instead, banks tend to pursue strategic pricing practices at an individual product or customer level. We found a range of such practices across banks, designed to attract and retain higher-value customers.”
Australians hold at least $1.4 trillion in bank deposit accounts. Of those, 89 per cent of them are in the big four banks – the Commonwealth, Westpac, NAB and ANZ – and the next six smallest institutions.
The savings provide about a third of the funds banks use for their overall businesses.
The ACCC found banks, particularly the larger institutions, had over recent years relied more heavily on one-off or conditional interest rates on their savings to attract new customers. But existing customers, loyal to their bank, often missed out.
Even those attracted by a bonus interest account found it difficult to get their extra cash.
“The conditional nature of bonus interest rates and introductory interest rates means that the amount of interest actually received by consumers (that is, the effective interest rate) can be considerably lower than the headline interest rates suggest.”
The difference between a bonus and normal interest rate could be enormous. In one example cited by the commission, a person would earn $328 a year in interest on $5000 of savings if they met the conditions of the account. If they failed to meet those conditions, they would earn just $18.
The report found banks engaged in the “widespread” practice of using targeted offers and promises of higher interest rates to individual customers, usually those with substantial savings. This meant banks did not “need to compete as aggressively on their headline interest rates”.
Another problem was the complexity and opaque nature of a market in which the nation’s banks have more than 900 types of transaction and saving accounts.
The ACCC said consumers often faced mountains of red tape and jargon when trying to understand their accounts. It found across the four major banks, the terms and conditions on a savings account ranged between 25 and 108 pages.
The commission made a series of recommendations it said would give customers more information about the true nature of interest on their savings. These include ongoing monitoring by the ACCC of the deposit account system and requiring banks to tell customers when interest rates are changing on their savings.
It said the government should reconsider an idea, first examined by former treasurer Wayne Swan more than a decade ago, to introduce bank account portability. Fiercely resisted by the banking sector at the time, portability would resemble the move in the mobile phone industry that enabled customers to transfer their phone number between providers.
But the ACCC said it should be back on the agenda, noting technology and the banking system had evolved since it was first examined in 2011. It backed a formal review that would “consider the likely costs, benefits, risks and opportunities that different approaches to bank account portability would present”.
Chalmers said the government expected banks to treat their customers fairly, with Treasury to examine the report’s recommendations as well as outstanding proposals from the ACCC’s 2020 investigation of the home loan market.
While not revealing his position on the proposals, Chalmers signalled that the government was prepared to reform the savings sector.
“Increased interest on savings should be a silver lining from the higher mortgage rates Australians are now experiencing. Just as we want Australians to get a good deal on their mortgages, we want savers to get the benefits of higher interest rates,” he said.
Australian Bankers’ Association chief executive officer Anna Bligh said the report showed there was strong competition among the nation’s banks for customers, noting that 850,000 mortgages had been refinanced between lenders over the past two years.
She said banks had paid more interest to deposit holders than they had received in interest payments on mortgages. “The share of interest passed onto customers in Australia is higher than in the United Kingdom, United States, Norway, Canada and New Zealand,” she said.
Bligh said banks would consider each of the ACCC’s recommendations.
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