Week in Review
Bad things happen: Giving our money to the banks for nix
More than a third of the money New Zealanders have in our Aussie-owned banks is earning us no interest - or virtually none. And it’s costing us somewhere between $400 million and $900 million a year in lost interest - depending on how you crunch the numbers. The banks know this - but it’s one of the reasons they are so very profitable in New Zealand.
In part 2 of Newsroom’s “Bad Things Happen"series, we look at the abysmal rates of interest being offered on savings products. Find out if you are one of the 400,000 people affected.
Edward Anderson* is in his 80s. He’s retired, good with money, and he used to run a business. The sort of person that religiously checks his bank statements. Five years ago he took out an ANZ “Serious Saver” account. He was offered around 4 percent interest on his savings as long as he didn't make any withdrawals and deposited $20 each month.
Some months, everything was fine - he got his full interest rate. But some months he didn’t, even though he met all the criteria. Instead his interest rate was closer to 0.1 percent. Like, almost no interest at all. Anderson queried it with his bank, and they apologised and paid the difference. Said they'd fixed the problem. But then it happened again. And again. Seemingly at random, the bank would pay him only 0.1 percent. He’d go in, the bank would apologise and pay up.
But it worried him. It was the difference between getting around $450 a month in interest and getting $12. Over a year, he reckoned he could lose more than $5000 if he wasn’t vigilant.
It took three visits to the bank to sort the problem, though it was eventually fixed. The bank told him its system was automatically withholding his "premium" interest rate payments (everything except the minimum 0.1 percent base rate) when the last business day of the month fell on the wrong day. It sounded complicated, and ironically, it was the bank that had originally fixed Anderson's payment schedule.
Anderson's problem is solved, but he is far from alone in missing out on interest. In fact he’s one of approximately 400,000 New Zealand bank account holders Newsroom estimates are receiving 0.1 percent interest or less on the money they have in the bank
That’s ‘might as well just put it under the mattress’ territory.
As interest rates continue their slow ride to the bottom, the 4 percent Anderson received in 2014 sounds like an idyll. These days ANZ’s Serious Saver account pays 1.3 percent - even with the bonus. But even so, Newsroom estimates these 0.1 percent-or-less New Zealanders are missing out on approximately $382 million in interest payments every year.
Instead of going out to customers, that money is going to the banks’ bottom line.
Crunch the numbers another way, and Newsroom reckons a third of all money that Kiwis put into New Zealand’s big four Australian-owned banks is paying a 0.1 percent interest rate or less.
No wonder those four banks - ANZ, ASB, BNZ and Westpac - together made $5 billion last year. No wonder our banks are some of the most profitable in the world for the size of the population.
There are several reasons why so many of us are giving so much of our money to our banks for free - or almost. Reserve Bank numbers suggest almost 20 percent of money in the banks ($34.4 billion out of a total of $181.8 billion) is held in so-called transactional accounts - otherwise known as cheque or current accounts. (See table below for an accounts split.) These accounts typically don’t earn interest at all; in fact they often garner fees.
Then there are “call” deposit accounts, which are ostensibly savings accounts, but where people are allowed unlimited access to their money. These accounts typically pay minimal interest - generally 0.1 percent or less.
And there’s a third way that New Zealand savers are missing out - so-called bonus savings accounts. That’s like the one Anderson was in, where savers earn a reasonable interest rate, but only if they meet certain criteria, like depositing a certain amount of money each month, or not making more than one withdrawal.
An estimated one in eight New Zealanders, or around 400,000 people, have their savings in these bonus accounts. ANZ has its “Serious Saver”, Westpac its “Bonus Saver”, BNZ has “Rapid Save”, ASB “Savings Plus”, Kiwibank “Fast Forward Saver”.
These bonus accounts offer an extremely low base interest rate - normally 0.1 percent, even 0.05 percent. But there’s a bonus interest rate of between 1.25 percent and 1.4 percent on top, as long as the saver meets the criteria.
The trouble is that by the banks’ own calculations, somewhere between 20 percent and 33 percent of customers miss out on their bonus interest rate every month because they don’t meet the criteria. It used to be more, Newsroom understands.
At the 33 percent figure, Newsroom estimates that difference will be costing customers almost $130 million a year (see table below).
That money is all benefitting the banks.
It’s the banking equivalent of a gym membership. When we sign up, we think we are going to be great savers (or gym bunnies). But something gets in the way and we don’t meet our savings (or gym-going) goals.
And the bank (or the gym) is laughing all the way to the, er, bank.
As the table shows, if all savings accounts, including “call” accounts, paid out at 1.4 percent, New Zealanders would get an extra almost $400 million in interest from their banks.
And if everyone’s money in savings and transactional (current or cheque) accounts was earning 1.4 percent, the amount banks would lose - and customers would gain - would be upward of $860 million, Newsroom’s calculations showed.
(Just for interest, we also worked out what we’d gain if all savings and transactional accounts paid out at the average interest rate for term deposits - 2.7 percent. That number is almost $2 billion. But we know that’s Peter Pan territory.)
Why do so many of us miss out?
The biggest tranche of people missing out on earning interest is people with too much money in their current or their "on call" accounts. Often that’s laziness, lack of financial literacy, or just lack of knowledge.
A recent survey from investment platform Sharesies found 70 percent of people believe the average interest rate on a savings account is between 1 percent and 3 percent. Remember a lot of us are getting 0.1 percent - or less.
Another 21 percent of people in the Sharesies survey thought you’d be getting more than 3 percent on a savings account. Dream on.
We also miss out because even if we know we could be getting a better interest rate somewhere else it's way easier to stick with the status quo. You can switch electricity or telco providers with one phone call. Not so your bank.
Meanwhile the four big Australian-owned banks have an 89 percent market share in New Zealand; Kiwibank has another 5 percent.
Yet some of the smaller banks have way better options for savers than the big four (or five).
Banking Ombudsman Nicola Sladden says her office dealt with 16 inquiries, 23 complaints and 3 disputes about bonus interest savings products between 2015 and 2019. The number of complaints increased steadily from 2 in 2015-2016 to 11 in the most recent year.
Which is actually a pretty small number given potentially thousands of dollars are at stake. It just shows how inert we are when it comes to our banking.
Sladden says the customers who complained were concerned because they hadn't received the returns they were expecting, or hadn't been given enough advice on how to get the bonus payment.
“Consumers were disappointed,” Sladden says.
The sort of bonus savings products offered in New Zealand were quietly removed from the UK market after complaints and investigations from the regulator there.
The Ombudsman, as well as the Financial Markets Authority, and Consumer Affairs Minister Kris Faafoi, are all beefing up scrutiny of banks around complex and confusing consumer products.
Sladden says her office identified problems with bonus savings accounts and has spoken to banks.
“If we find there is a product causing a lot of confusion and harm, we feed back to the sector and ask them to review the way they are selling it.
“We did identify a number of complaints related to the way these products were being sold and we reminded all banks they needed to communicate better with savers.”
A UK banking specialist told Newsroom that the sort of bonus savings products offered in New Zealand were quietly removed from the UK market after complaints and investigations from the regulator there.
Meanwhile the UK’s Financial Conduct Authority has recently started publicly naming and shaming the banks paying the worst interest rates on deposit, as a way to alert unwary customers.
Life gets in the way of saving
“In my experience people often don’t meet their bonus interest rate goal,” a former banker told Newsroom. “People that are good with their money use a term deposit. But people that aren’t that good with their money get one of these bonus savers.Trouble is, some short-term expense comes up and that can happen every month.
“They think they are going to be able to save, but instead they find themselves making multiple withdrawals each month. And that can often mean they are being charged a lot in fees on top of not getting a good interest rate.”
Bank research and ratings company Canstar calculates that while efficient savers do well in bonus savings accounts, inefficient ones are poorly served.
A saver who starts out with $25,000 in savings, deposits $1000 a month over a year and follows the account conditions will end up with $630 in bonus savings after 12 months, Canstar says.
But if that same saver with $25,000 in initial savings misses out on the bonus for the entire year, they’ll get only $58. In a more flexible account they’d earn $222.
Canstar operates a rating system of New Zealand banking products, including bonus savings accounts. All our Australian-owned banks get only a three star rating out of five in terms of value for money for bonus savings accounts for all but the most disciplined savers. Three stars means “customers could do better” by switching to another product, Canstar tells Newsroom. Kiwibank’s “Fast Forward Saver” bonus savings account rated one star.
The banks respond
Banks argue it’s not their fault if customers miss out on their bonus interest rate. After all, they know what they are getting into when they take out a bonus savings product. In fact, as ANZ told Newsroom: “It’s important to note that many people choose this product because it encourages them to save by discouraging withdrawals.”
The four Australian-owned banks told us they contacted customers if they regularly missed out on their bonus payments. They also all said they had made changes over the past few months to simplify their bonus product, or make it more likely customers would get the premium interest rate.
As Westpac told Newsroom: “In July we simplified our bonus interest qualification criteria for customers. They now simply need to grow their balance by $20 each month, whereas previously they had to increase their balance and make no withdrawals.
“We’ve also introduced a bonus interest indicator for online customers showing how much they need to deposit to earn bonus interest for the month. We have proactively sent emails and online banking messages to customers who may be regularly depositing funds but falling short of the bonus interest qualification, and will continue to do so."
The big four banks estimated that between 80 percent (ANZ) and 66 percent (BNZ) of customers received the bonus interest rate.
But one former senior bank staffer, who didn’t want to be named, argues a product which doesn’t work for somewhere between a third and a fifth of customers is badly-designed.
“Banks should be proactive and make a savings account which is in the best interest of customers more of the time, and the bank less of the time,” the banker says.
A 0.1 percent interest rate on a savings account? “That’s an attractive proposition for a bank. Cheap money."
NZ-owned Heartland Bank doesn’t have a bonus savings account, which may be one reason the bank, which started life as the Ashburton Permanent Building & Investment Society, was awarded Canstar’s Bank of the Year – Savings, in both 2018 and 2019.
Heartland’s flexible savings product offers a 1.6 percent interest rate with unlimited withdrawals and is Canstar five-star rated.
“We decided to focus on simplicity, offering a call account with no strings attached,” says Chris Flood, chief executive of Heartland. Flood wouldn’t be drawn on whether his competitors’ products were too complex, but reckons “simplicity helps deliver good customer outcomes”.
And a 0.1 percent interest rate on a savings account? “That’s an attractive proposition for a bank,” Flood says. “Cheap money for those banks.”
Even canny customers get confused
For Anderson, it was the complicated way his ANZ savings product was set up that tripped him up. He had to deposit $20 a month, by the last business day of the month. But the way the bank had loaded his automatic payment meant that the money was set up to go out at the weekend or on a public holiday. That meant it wasn’t processed until the following week, which meant it didn’t meet the ANZ deadline of the last business day of the month.
It took almost a year and three visits to the bank to sort the problem. Anderson says it was only because he’s vigilant with checking his bank statements that he noticed the mistake.
“Someone with less time or who was less scrupulous with their finances could have missed out for a long time,” he says.
Meanwhile Anderson isn’t the only person to find bonus savings products complicated. Personal finance author and commentator Mary Holm recently tried to sort her own short term savings and says it was far from easy.
“I was trying to work out what was the optimal strategy for me for putting money aside for tax. Should it be in this account or that account? I’m pretty financially literate, but I spent a while looking at the rules and it was confusing.”
Take the ASB’s Savings Plus account. Base interest is 0.1 percent, full reward interest is an additional 1.4 percent and there’s a partial reward interest of 0.1 percent.
Under “Is it right for me?” ASB explains: “To earn base interest plus full reward interest you can make one withdrawal during the first five days of the calendar quarter. No other withdrawals are permitted.
“To earn base interest plus partial reward interest you can make one withdrawal but if that withdrawal is during the first five days of the calendar quarter then you can make a second withdrawal at any time during that calendar quarter.”
Holm says it’s just not in the best interests of consumers when accounts are “unnecessarily complicated”.
“There’s always the suspicion that the conditions might not be optimal for the customer.”
Confusion as a marketing tool
Back in 2006, then Telecom NZ chief executive Theresa Gattung was outed at a conference in Sydney admitting to analysts that telecommunications companies worldwide deliberately made pricing as confusing as possible as a way to make money.
“What has every telco in the world done in the past? It’s used confusion as its chief marketing tool. And that’s fine,” she told analysts in a speech which later circulated on the internet in New Zealand.
“You could argue that’s how all of us keep calling prices up and get those revenues, high-margin businesses, keep them going for a lot longer than would have been the case.”
Gattung spilled the beans to make the point about the emergence of a new, more transparent, Telecom looking to give power to its consumers.
Since then, widespread reforms in the telecommunications sector have slashed prices for customers and opened up the market for new, innovative players and products.
You might argue the same hasn’t happened in the banking sector.
Financial Markets Authority chief executive Rob Everett has castigated the banks over recent months for having overly-complicated products, poor systems, and deficient processes to make sure customers weren’t being ripped off.
In September, Everett talked about FMA and Reserve Bank conduct and culture investigations “finding processes and practices that were sloppy and were not adequately designed to look after customers. We saw insufficient focus on the risks posed to customers of poor behaviour whether by deliberate conduct or sloppiness.”
Everett has repeatedly called for regulation of the banking and finance sectors and it seems Consumer Affairs Minister Kris Faafoi is listening. A new financial conduct regime should be introduced to Parliament by the end of the year, although there’s no time frame on when it might come into force.
As the FMA boss says: “It is about treating your customers fairly, recognising and prioritising the interests of your customers, giving your customers clear and honest information. Designing products that are suitable, targeted at and sold to appropriate groups. Ensuring your after-sales care is good, and effectively monitoring your own conduct and that of suppliers and distributors, to ensure you can identify, rectify and learn from mistakes.”
It’s not rocket science. The only problem: banks can make a load more money doing it the other way.
* Not his real name. He has no wish to get into a fight with his bank.
Get it early – This article was first published on Newsroom Pro and included in Bernard Hickey’s ‘8 Things’ morning email of the latest in-depth business and political analysis. Get it early by subscribing now or starting a 28-day free trial.
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(The Bad Things Happen series takes its name from a quote from FMA chief Rob Everett that "bad things happen when there's no regulation of banks.")
Part 1- The tax on first-homebuyers
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