Consumers are missing out on earning higher interest on their savings due to ongoing barriers to searching for, and switching between, retail deposit products, the ACCC’s Retail deposits inquiry final report has found.
The report found that banks use strategic pricing for retail deposit products, including introductory and bonus interest rates, and a range of fees and charges, which creates complexity and makes it difficult for consumers to compare products.
Banks also segment customers through product design and conditional interest rates, leading to significant differences between rates across comparable products, even within the same bank.
“Our report 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,” ACCC Chair Gina Cass-Gottlieb said.
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,” Ms 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.
“We are also recommending that 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,” Ms Cass-Gottlieb said.
“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.”
The ACCC has also recommended that the 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.
“We understand that it can be difficult and time-consuming to switch between banks. Bank account portability has the potential to greatly simplify this process for consumers to switch and take 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.
Banks’ funding needs
In its report the ACCC found that banks rely on retail deposits for close to 30 per cent 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.
Consumers often do not receive bonus interest and may be better off with other products
While offers of bonus and introductory interest rates are commonly used by banks to attract customers, the ACCC has found that in the first six months of 2023, on average 71 per cent of bonus interest accounts did not receive bonus interest in any given month.
Figure 1: Estimated average effective interest rates across all bonus interest accounts – select banks, July 2019—May 2023
Note: In Figure 1, the estimated average paid interest rate is shown weighted by number of accounts (dashed line) and weighted by value of deposits in the accounts (solid line).
The ACCC also highlighted that for one bank’s bonus interest account, a customer who starts with $5,000 and adds $200 per month could earn around $328 of 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% pa, which would return interest of $232 over a year.
“Consumers can find the complexity of the pricing of retail deposit products overwhelming. 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,” Ms Cass-Gottlieb said.
“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.”
The ACCC report also draws on ACCC research into how consumers interact with retail deposit products, highlighting the challenges consumers face when searching for and switching between retail deposit products.
On 14 February 2023, the Treasurer directed the ACCC to conduct an inquiry into the market for retail deposit products supplied by authorised deposit-taking institutions. It included how banks set interest rates, as well as other terms and conditions.
On 21 April 2023, the ACCC published an issues paper for the inquiry. In response, the ACCC received 50 written submissions from consumers, banks, consumer bodies and other stakeholders.
The completion of the Retail Deposits Inquiry marks the end of the ACCC’s specifically funded financial services competition program. The role was announced in the 2017-18 Budget, with funding recovered through the Financial Institutions Supervisory Levy. The funding was discontinued in the 2023-24 Budget.
The ACCC will continue to investigate allegations of anti-competitive conduct in the financial services sector, as part of its economy-wide remit.