When the Reserve Bank raised interest rates this month, most of the media’s gaze was on how the hike would sting people with mortgages. There’s been relatively little said about savers – probably because our hefty levels of household debt leave many people exposed to even fairly small rate rises.
This suits banks nicely. If the humble savings account gets far less scrutiny from politicians and the press than home loans, that makes it easier for banks to get away with tricky pricing.
Lately, however, the financial markets have been paying plenty of attention to the $1.7 trillion market for people’s deposits, where there’s a growing fight between banks.
This battle for deposits is important for bank customers and shareholders alike. It has the potential to help people get a better return on their money, while for the big banks, serious profits are at stake.
A crucial reason big banks can make so much money is their easy access to deposits – a low-cost and stable form of funding, much of which comes from households. Banks benefit from the fact deposits worth up to $250,000 are guaranteed by taxpayers. If banks can access this money more cheaply, it’s a big advantage to their shareholders, and if a bank can hold your money without paying any interest on it, even better for them.
As a result, it’s long been the case that most banks will come up with all sorts of ways to attract enough deposit money so they’re well funded, but also not pay out too generously. Typically it means offering “bonus” or “reward” accounts that pay a decent rate of interest, but only if you jump through a bunch of complex hoops, such as growing your balance every month, or not making withdrawals.
While these sorts of rules obviously help the bank make more money, they mean many customers get dudded out of a decent rate of interest on their money.
A 2023 report from the competition watchdog found more than two-thirds of “bonus” interest accounts didn’t receive any bonus interest at all. And if you don’t qualify for “bonus” interest, the “base” rate that you do get paid is typically miserly. Canstar said on Friday said the base rates on “bonus” savers for the big four ranged between 0.01 per cent and 0.25 per cent.
Why is this relevant today? Well, lately deposit pricing has been on the agenda for a couple of reasons.
First, when official interest rates change, banks often use it as an opportunity to quietly “re-price” their own rates (changing their interest rates by a different amount to the RBA, in a way that suits the bank’s bottom line). Re-pricing mortgages risks a political backlash, but it’s easier for banks to do it on savings accounts.
Secondly, there’s been much discussion in financial markets about the rise of Macquarie Group, which is trying to disrupt the deposit market, as it has done in home loans.
Macquarie has sought to lure customers by avoiding the complex terms and conditions on savings accounts, and offering an interest rate that’s competitive, without the need to make deposits or a minimum number of transactions.
It’s grabbed a lot of business, doubling its market share from 3.1 per cent to 6.3 per cent since 2020. Like “challenger” brands often do, it’s also taking shots at the bigger incumbents, saying the big four are sitting on about $285 billion in bank deposits that pay zero interest – what Barrenjoey analyst Jonathan Mott calls “free money”. (Macquarie has $5 billion in zero interest deposits from its business customers).
When interest rates are rising, that “free money” becomes even more valuable to a bank, because it still costs the bank nothing, but now it can lend that money out at a higher rate.
Macquarie is clearly doing this for its commercial own goals – it is known as the Millionaires’ Factory for a reason. But all the same, it is hard to argue with more competition in a concentrated sector such as banking.
As Reserve Bank officials told a parliamentary hearing this month, there’s often less competitive pressure in the deposit market than in home loans, where mortgage brokers have educated much of the borrowing public that they need to regularly shop around for a decent rate.
RBA governor Michele Bullock told the hearing that compared with mortgages, it takes the public longer to think about switching for a better deal on their deposit account.
Bullock reminded customers of an age-old lesson in banking and finance: inertia is the enemy of a good deal. “It comes back to that people are always encouraged to look around for the best deal in mortgages, so look around for the best deal on deposit rates as well. Don’t just sit there. But people sometimes are a bit prone to inertia,” she said.
For the wider banking industry, on the other hand, Macquarie’s attempt to pinch their low-cost deposits is another competitive threat, and it comes just after Macquarie’s home loan onslaught.
For some analysts, such as Jarden’s Matthew Wilson, the disruptive threat of Macquarie’s deposit push is a major long-term threat to bank profits. Wilson, who has a “buy” rating on Macquarie, sees the complex terms and conditions that banks put on deposit accounts as an “unnecessary source of disgruntlement” for customers, and he sees the major banks’ deposit pricing tactics as leaving them open to disruption.
So far, however, recent results suggest Macquarie’s aggressive push for deposits isn’t having a huge impact on the big four banks. Commonwealth Bank last week said it expanded its already dominant position in its latest half, including winning more deposits that pay no interest.
But over the longer term, Macquarie’s rapid expansion into mortgages has proven it can shake up the retail banking oligopoly. Whether the Millionaires’ Factory can keep on grabbing customers from the big four (and from other banks) looks set to remain one of the most intriguing battles in the local banking industry for years to come.
For customers, the fight brewing over deposits is good news, but as Bullock reminded people, it also requires customers to look around for a good deal. It will be interesting to see how many people follow her advice.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
