Breaking the bank: 5 bank secrets that cost savers over $4 billion each year

Banking is a lucrative game.

Between them, New Zealand’s retail banks made $9.96 billion (yep, that’s with a ‘b’) of pre-tax profit in 2022. Crunching the numbers, it works out to a staggering $27 million a day, or $1.1 million per hour.

While the banks are laughing all the way to the – well – bank, what most Kiwi don’t fully understand is how they’re making that money.

(Spoiler alert: Kiwi are the ones losing out.)

So, here are five secrets the banks don’t want you to know about how they maximise their profits – and how easy it is to do something about it. 

Secret #1: The money sitting in transaction accounts is costing Kiwi $2.2 billion in lost interest each year.

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Right now, there is $44 billion NZD sitting in Kiwi transaction accounts, where the banks pay us almost no interest.

Now, obviously, everyone needs a bit of cash handy for stuff like paying bills, and everyday expenses. And actually, not long ago, when savings accounts interest rates were close to 0% anyway, it didn’t really matter even if Kiwi kept a giant wad of cash – like, say, $44 billion – in our transaction accounts.

But, today, when you can earn upwards of 5% on your money elsewhere, you’re missing out BIG TIME by holding more than you need in a transaction account.

$44 billion at 5% = $2.2 billion in potential interest that we’re losing out on.

Tip #1: Keep a small balance (say $1,000) in your transaction account, and monitor it closely, then put the rest of the money in a high-interest savings account. Even better if it’s one with no strings attached, where you can keep your cash on-call.

Secret #2: They look great on paper, but “bonus saver” accounts have sneaky T&Cs (and harsh penalties) that cost Kiwi $600 million in interest each year. 

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I worked in banking when “bonus saver” accounts first became a thing. They were a response to research that showed customers really liked the idea of being offered a reward for making progress towards their savings goal.

At the time, interest rates were decent, so banks launched their bonus interest accounts with a hefty base rate (say 12%) and a much smaller (say 1%) bonus rate.

Fast forward to today, and the game has changed.  

The banks now pay a tiny base interest rate (1.53% average across the six banks with a bonus saver product), and a “big” bonus (ahem) averaging 2.81% p.a. if the customer meets a bunch of tricky conditions during the month. 

What sort of tricky conditions? The banks differ on the details, but here’s a sample:

Suffice to say, these conditions are designed to trip us up – benefitting the bank and costing you, the saver, in returns. And it’s a real money-spinner for them.

At the time of writing, Kiwi have an estimated $30 billion in these accounts, earning about 3.00% p.a. on average – costing us about $600 million in lost interest a year. 

Tip #2: Avoid bonus saver accounts like the plague, unless you're extremely disciplined when it comes to meeting the conditions every single month. These products are well out-of-date with customer needs, and most savers would be far better off with a high-interest simple savings product.

Secret #3: The way banks manage old and outdated savings products costs Kiwi around $850 million in lost interest earnings each year.

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This all comes down to one of banking’s dirtiest little secrets: something called “product lifecycle management”.

In banking, customer inertia is one of their greatest assets. And there are three ways the banks capitalise on customers who aren’t closely watching their money…time and time and time again. 

Banks actively manage the interest rate on savings products downwards over time.

When banks launch a new savings product, it goes like this.

They’ll give it a snazzy name like “Accelerator”, and start it off at a great interest rate - throwing everything they can at growing the balance to hundreds of millions of dollars in customer funds.

But after a few years, they’ll decide they want to launch a newer, shinier product, at an even higher interest rate – which they’ll call something equally snappy, like “Money Maker”.

And when they launch the new product, they’ll lower the interest rate on the old one, making sure they don’t automatically move any existing customers (or their hundreds of millions of funds) to the new account, of course.

As an example, I’d guesstimate that there’s about $20 billion sitting in outdated bank online savings accounts, earning roughly 2.50% p.a. – and costing Kiwi $500 million in interest each year.

There are other products the banks only offer these days as a way of maximising revenue.

Take traditional – or simple savings type – accounts, for example.

Simple savings accounts were designed during the days when it was more common for customers to head into a branch to manage their banking. But these days, when most of us do all our banking online, they’re pretty much the same thing as a high-interest call account.

Banks hold onto these products purely to maximise their revenue – and the added benefit to the customer is hard to see.

There’s likely $10 billion sitting in these old simple savings accounts, earning an average rate of 2.5%. Kiwi could be earning roughly $250 million more in interest each year with their money elsewhere.

Now that it’s so easy to move our money around, you may as well have your hard-earned savings in a high-yield call account. 

And retired products are another golden goose for banks. They’re costing Kiwi (and making the banks) $100 million in interest each year.

The ultimate move when it comes to product life-cycle management is a particularly sneaky trick the banks like to call grandfathering.

My colleague takes a deep dive into this tactic in this article. But, in short, it’s when a bank simply stops selling an old savings product altogether, lowers the interest rate on that product to almost nothing, and then just leaves all existing balances in there.

It’s a pretty dubious practice – and a customer-centric approach would surely see banks close all accounts in the grandfathered product and proactively move customers to a newer, better product. 

Right now, my guess is that Kiwi have at least $2 billion in these accounts, earning next to nothing. That’s $100 million each year in interest down the toilet.

Tip #3: Do an audit of your accounts immediately. If your savings account pays less than 4.00% p.a., you're not always meeting the conditions to earn bonus interest, or – worst of all – the bank doesn’t even sell your savings product anymore, close it and move your money to a higher interest-paying option ASAP.

Secret #4: Although term investments offer you a better interest rate for locking your money away, the banks play serious games here too. I reckon it costs punters about $500 million dollars in lost interest each year.

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Term investments (or term deposits) have been around forever. And as a former bank product manager, this was one of our favourite ways of gaming customers and maximising bank profit.

And they have a few tricks up their sleeve to do it…

The first, is that they offer a “headline” special for a particular term – say, 9 months – paying a really competitive interest rate. Meanwhile, rates for other terms are significantly lower, sometimes by as much as 1% to 2% per annum.

Why? To maximise bank profits!

Another trick is that of automatically rolling term investments over to the same term when they mature. So six month investments get rolled over for six months more, etc..

But you only signed up to six months because that was the best rate at the time. Now, the bank has moved the headline special to eight months – as they do – and the six-month rate is much lower. So you miss out.

If customers are paying attention, they’ll spot this and move their money to get the best rate. But lots aren’t, and won’t. And the banks reap the benefits.

Last but not least is the pretty standard practice of only paying interest to customers at “maturity”, or the end of the investment term. Meanwhile, the banks are lending your money out and charging interest on it at least monthly. In short, the banks have your interest sitting in their bank account, earning them money.

If you’ve got a 12-month term investment locked in at 5.50% per annum, receiving interest at maturity instead of monthly costs you 0.14% in returns. That’s YOUR money the bank is keeping!  

Tip #4:  Shop around for the best term investment rate, and pay attention to when your investment comes up to maturity so you can shop around again!  Look for options with monthly or quarterly interest – rather than at maturity.

Secret #5: Notice Saver accounts are the “shiny new thing” from a bank savings product perspective – and they’re good, but there are still better options out there that could earn you at least $50 million more in interest per year.

Source: Giphy

Notice saver accounts are a mash-up of a regular savings account, and a term investment, where you need to give notice – usually 32, 60 or 90 days – in order to get your money out.

So far it’s only Westpac, Kiwibank, Rabobank and Heartland that offer notice saver products, although I’d expect most other banks to join the fold sooner or later. 

As a general rule, you can’t get your money out without the required notice period although Kiwibank may make an exception (which will involve you being hit with an “immediate withdrawal charge”).

It’s a better savings option than most, apart from term investments. But remember that old trick of product lifecycle management.

I’d estimate there’s upwards of $10 billion in this type of account by now – but with rates averaging around 4.5%, there are better options out there that could earn at least $50 million more in interest per year.

Tip #5:  If you’re comfortable having to wait a month or more to get your money out, the interest rate is better than most other savings options – but you’ll need to plan well in advance for when you do need the cash. In reality, you’re probably better off actively managing a series of term investments with staggered maturities. It’s a trick called laddering, where you’ve got a bunch of term investments, each maturing a week or two apart, that you just keep rolling over unless you need the money.

So that’s a lot to take in. But let’s summarise the parts you really need to remember: 

1. Keep a small amount of money in a transaction account and pop the rest in a high interest savings account. Keep topping up your transaction account only as you need to.
2. Do *not* get sucked in by Bonus Saver accounts! Unless you're incredibly disciplined
3. Check if your savings account is an old or grandfathered product and if it is, put your money elsewhere.
4. Keep on top of your term investment interest rates and when they roll over.
5. Actively manage your investments and stagger maturity dates.

And now for THE GOLDEN TIP

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If you’ve been keeping track of how much Kiwi are losing (and the banks are making) from all of this – it’s pretty eye-watering stuff, right?

And in case you haven’t, here’s the grand total:

$4.2 BILLION

It’s a number too big for most of us to even wrap our heads around. And it’s roughly 40% of the banks pre-tax profit – all from ‘gaming’ their customers. How much of that have they made off you?

There’s one more thing though...

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We’re not a bank, but do many of the same things a bank does. And our Squirrel On-Call account is worth a look, if you’re wondering how to claim back your lost interest.

Here’s the deal: 

• 5.00% p.a. interest paid monthly
• Balances ON CALL
• 100% of funds held on trust with a major New Zealand bank
• You can manage your money via the Squirrel mobile app
• Funds can be moved within 2 hours on business days (changing to 365 days a year later this month).

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(It takes 5 minutes, and all you need is your passport or drivers’ licence.)