One Friday earlier this month, I arrived home from work after a lovely afternoon cycle – and checked the mailbox on my way in.
(I know, who gets mail anymore?)
And there, camouflaged in a plain envelope, was a letter from ASB: a statement for an account I opened many moons ago (which you can take a look at here).
Opening the account was an exercise in curiosity more than anything else. It only briefly had a balance, and the last transaction on it was about 15 years ago. There’s been about $2 in there ever since.
The account is one of ASB’s PrizeSaver accounts, introduced back in the day as a general-purpose savings account, offering low fees, and a mid-range interest rate, paid monthly. One of the account’s main benefits was a monthly “cash prize” draw for account holders – and at the time of writing, ASB offers 10 prizes of $1000 each month (detail I found buried in its website).
As I scanned the statement, the interest rate caught my eye: 0.20% p.a. on all balances.
So, this next bit, I found pretty hilarious.
My $2.00 balance had earned no interest since my last statement in August 2022, because they round interest to the nearest cent, which, on $2.00, is a grand total of zero cents.
In other words, ASB has had my money for free over the last 6 months. So, what's it done with that $2 of mine?
Well, it's lent it to its borrowers.
Just over half of that money will have gone to home loans, and the rest a mixture of credit card, personal loans, business loans, and agri-business loans.
It’s a reasonable assumption that, on those loans, the average interest rate they’ve charged over the last six months would be roughly 6.00% p.a. All while paying me 0% p.a. on my savings.
That’s a pretty healthy margin when you multiply it out across the balances they hold.
This is how banks work, in a nutshell.
They take deposits from their customers and wholesale funders, and lend that money out to people who need it.
Banks make the vast majority of their money on the difference between what they pay depositors and wholesale funders, and what they earn from borrowers. In technical terms, it’s called their net interest margin, or NIM for short – banks love an acronym!
In essence, the banks have two primary jobs to do:
- Make sure they approve the right borrowers and then ensure they make their repayments;
- And ensure depositors can access funds as needed for transaction and savings accounts, or once a term investment matures.
They’ve been doing it for hundreds of years, which is why they’re so good at it (and why you rarely see banks making a loss).
But when it comes to banks savings products...not all are created equal.
And if you check out ASB’s website, you’ll see that a number of its other savings products offer far better returns than PrizeSaver's 0.20% p.a.
How so? Well, PrizeSaver isn’t a product they sell to customers anymore. It’s been “grandfathered” a.k.a. taken off their active product list.
And so, as interest rates have increased over the last 18 months, ASB hasn’t passed those increases onto its PrizeSaver customers.
Grandfathering is one of the sneakier ways banks make money, profiting off “lazy” customers who aren’t actively monitoring their account options.
And while the balance held in these accounts is probably dwindling, the banks are making fat margins on it.
(By the way, the prize pool they’re dishing out each year is only $120,000. Let's say they have $100m in balances in this account at a 6.00% margin, that’s $6 million in revenue annually. So, they can afford the $120,000.)
In its most recent half-year profit announcement, ASB’s Net Interest Margin had grown by 0.33%. I’m one of the suckers who’s contributed to that, by leaving the princely sum of $2.00 in an account for ASB to profit off handsomely.
The practice kind of flies in the face of ASB’s “What we stand for” – which you can find on its website:
What we stand for:
Supporting New Zealanders' financial progress means focusing on doing the right thing and being transparent about our progress and performance. Our Environmental & Social Framework recognises the interconnectedness of commercial, environmental, and social matters against the backdrop of changing community expectations. It provides a reference point for our people and stakeholders on the minimum standards we seek to uphold, the targets we aim to implement, and the governance and oversight in place to support our actions.
Phrases like “doing the right thing” never exactly ring true to this (cynical) ex-banker – but cynicism aside, you do have to ask yourself whether ASB is indeed living its “what we stand for” here.
And it’s not just ASB that does it. This practice occurs at just about every bank in New Zealand.
Banks play a really important role in society and deserve to make a profit – but grandfathering products (and strangling interest rates) is not fair practice.
In its first Monetary Policy Statement of the year, the RBNZ took a pot-shot at our banks over the interest rates they’re paying their depositors – so I’m not the only one who’s noticed what's going on.
In my mind, the onus doesn’t fall on “lazy” customers, but lazy bankers – who could be (but aren’t) migrating these account holders to similar, newer products that pay up to date interest rates.
To put it bluntly, I don’t like the practice, and I challenge our banks to do better.