The most boring product in finance

... is surely a dreary transaction or savings account?

They're incredibly important products though, and most of us use them. New Zealanders have over $239 billion deposited in these types of products with our local banks.[1]

Banks can take zero risk by parking these deposits with the Reserve Bank and earning the official cash rate (currently 5.5%). Or they can lend most of the deposits out at market rates (generally between 7-9% for home loans).

But the interest paid to depositors is usually 0% on transaction accounts, and an average of 3.10% on "unconditional" savings accounts. So there's a lot of interest that... doesn't quite make it through to depositors.

There's a name for these deposits

Banks refer to the interest rate sensitivity of deposits as "deposit beta".

Many customers don't take much care when picking an account for their deposits. They already have an account with a bank, so they often pick a savings account from that same provider because it's easy to open online. They transfer the money into that account, and accept whatever rate is offered. These customers have a "low deposit beta", which means they are providing free or cheap funding to their banks.

The Commerce Commission is currently carrying out a study into competition for personal banking services. People who understand the New Zealand banking scene well can already predict the key finding - depositors are being enormously underpaid.[2]

What can we do about it?

There's a broad range of action that Government can take, such as introducing open banking, digital identity, and proxy identifier frameworks to facilitate easy switching, opening up access to ESAS accounts (more on that later), and forcing fair treatment of customers through CoFI regulation.

But this article isn't about what Government could do. It's a quick highlight reel of New Zealand products that compete with traditional transaction and savings accounts.

If you're earning less than 5% interest in your savings account, then it's time to consider other options.[3]

First up: some banks try harder

It's worth shopping around.

Heartland is paying 5.00% on their Digital Saver account. No catches.

Rabobank is paying 5.25% on their PremiumSaver account (you have to increase your month-end balance by at least $50 each month in order to earn this rate).

Non-bank savings accounts

GroU Money is paying 5.00% on their simply rewarding savings account. They've tightly coupled their rate with the official cash rate so that you can expect a fair return today and tomorrow.

Squirrel is paying 5.25% on their on-call savings account. There is no silly business, like getting penalised for withdrawals, or only earning some of that interest if the balance is higher at the end of the month. It's just a nice, simple account that pays a higher rate.

Earning good interest on your transaction account

Booster recently launched a product called Savvy, which pays 5.00%.

The cool thing about this product is that you get a Mastercard debit card, so you can spend directly from an investment account. Savvy addresses the issue of needing to have enough funds lazing around in a transaction account (typically earning 0%) in order to pay for weekly expenses. Now you can keep those funds lazing around and they'll still earn 5.00%.

If you can bend your mind to variable returns on your savings...

When we think about savings account, we generally imagine a fixed rate of return. But it doesn't have to be that way. In fact you're probably missing out on some extra interest in order to get a sense of certainty about the interest rate.

And so it's worth considering cash funds like Kernel's Cash Plus Fund, which is currently returning 6.08%.

Or Aera, which is paying a target rate of 5.75% of their overnight savings account (and 7.00% on their 90 day notice product).

Here's one you didn't expect

Otto will soon be launching a "playful rewards program for your money". You connect your existing savings (and other) products, and earn tokens when you make progress towards your goals. Then you can play games with those tokens to win prizes.

So Otto doesn't actually provide financial products, but they bring attention (and adrenalin) to savings.

And finally one that I'm hoping will arrive soon

What if we could just deposit our savings with the Reserve Bank and earn the official cash rate, instead of a large chunk of returns being gobbled up by a bank?

Well that may be an option soon. The Reserve Bank has been considering the broadening of access to an "ESAS account", which enables the holder to earn the official cash rate on overnight deposits.

If that happens, we can expect providers to spring up that will simply park your deposits with the Reserve Bank. Because that's such a simple service, it would cost peanuts to run, so the vast majority of the interest could be passed through to depositors. This would be a big win for depositors.

Final words

Don't be a (deposit beta) statistic.

With higher rates these days, and the pinch from increased cost of living, there's a good prompt to put any extra dollars to work.

Disclaimer: Aera, Booster, GroU, and Otto are customers of Akahu. Kernel and Squirrel are not (yet 😛).


[2] Dave Corbett, a financial economist, former banking partner at PwC, and GroU Money CEO estimates that the five largest New Zealand banks generate over $7 billion in revenue annually from the variance between the interest these banks pay their customers for "on demand and short term deposits", and what they could earn by taking virtually zero risk and depositing those funds with the RBNZ to earn the official cash rate. These low cost deposits are why New Zealand banks are so profitable, and also explain why non-banks find it hard to compete with home loan rates (because they don't have this super-cheap funding source).

[3] These are lightning quick product descriptions, so I've ignored details like the credit ratings of providers, incoming deposit insurance, and the potential impact of PIE structures in the sections below. While those details are relevant when comparing some of the products, they don't change the key point around depositors being underpaid.

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