If you’ve been following our blog for a while, you might know that I’ve been on a bit of a crusade in recent years, calling out the bank practice of “grandfathering” products.
For the uninitiated, here’s a quick run-down of how “grandfathering” works:
- A bank decides to retire an existing product (let’s say a savings account) and replace it with a shiny, new one. The old product is now no longer available to new customers.
- Instead of automatically transferring existing customers to the new savings account, the bank leaves them sitting in the old one.
- Because that old product is no longer a selling point for the bank, it’s not maintained in the same way as current products. Over time, that means terms and fees may become less favourable, and—in the case of savings accounts—returns can be much lower.
I first wrote about this issue back in March 2023, after receiving a bank statement from ASB for my PrizeSaver account.
At the time, ASB was paying just 0.20% p.a. on its (grandfathered) PrizeSaver product, compared to more than 2% p.a. on its newer online call account.
While there was the chance to win a cash prize with PrizeSaver, I’m not sure I would call it a good or fair deal.
I finally got an email from ASB on 14 December 2024, notifying me of its plans to remove PrizeSaver—and that, as a result, I would be transitioned to its Saving On Call Account
Cue applause! I’m genuinely happy to see ASB make this move. It’s taken almost two years, but better late than never, I guess.
That left me wondering, how does the Savings On Call Account compare with the other 'simple savings' products on offer in market?
As a starting point, here’s how it stacks up to the Squirrel On-Call Account on a few key features:
At first glance, they look much the same—right? Until you get to that last row: the all-important interest rate.
Let’s get into why that might be.
To put it simply, it all comes down to how the banks set their margins
What some people may not realise is that banks earn interest on the customer deposits they hold:
- The majority is lent out to borrowers in the form of different loans—mortgages, business loans, credit cards—where the gross interest rate varies by loan type, currently ranging from around 5.5% up to about 23%.
- Then, the remaining portion is held with the Reserve Bank—where it earns an interest rate set at the Official Cash Rate (currently 4.25%). That’s the minimum.
The Gross Margin is calculated as difference between what banks earn on funds (either from the RBNZ or by lending it out to borrowers) and the returns they pay customers (depositors) and wholesale funders.
The Net Interest Margin (a.k.a. bank profit) is the Gross Margin less any operational costs associated with the running of that account.
Banks have full control over the interest rate they pay their savings customers—and therefore the margin they’re making—which is why you see such huge variance between different providers.
Why is there such a gulf between the rate of return on offer with ASB vs. Squirrel?
To illustrate, let’s look at a hypothetical example.
In this scenario, I’ve assumed that the average balance in these accounts is $5,000, and that ASB is doing nothing with those funds other than holding them on trust with the RBNZ, earning (the minimum) interest rate of 4.25% p.a.
Squirrel earns a similar amount on the deposits held on behalf of its investors.
In other words, ASB passes less than half of the interest earned—just 39% to be precise—onto its customers, keeping 61% for itself.
And that’s the best-case scenario. If ASB’s loaned some of that money out to borrowers in one form or another, its margin will be even higher. Note Squirrel does not lend out money held in our On Call Account, we hold it with two AA- rated NZ banks.
It’s worth noting again that all providers do have operational costs which somewhat offset that interest—although even once those are factored into the equation, the difference between ASB and Squirrel is still significant.
It’s worth noting that ASB is not alone here—it’s a similar story at both ANZ and Westpac, which each offer even lower interest rates on their simple savings products. BNZ and Kiwibank, meanwhile, do a comparatively better job of passing on those interest earnings to their customers.
Scaling that out to a national level...
We know, from RBNZ data, that Kiwi have roughly $107 billion stashed away in bank savings accounts.
Now, the numbers and assumptions won’t be perfect, but—leaving big business out of the equation—let’s assume that around $90 billion of that figure is made up of household and small business savings.
Note, for the purposes of this exercise, we’re looking just at the proportion of funds held in ‘simple’ savings accounts (excluding ‘bonus’ and ‘notice’ saver products) because the ‘simple’ savings accounts tend to offer significantly lower returns for the customer.
With that said, the table below estimates the total ‘simple savings’ market share across those three banks mentioned earlier (ANZ, ASB and Westpac) and what that would translate to in terms of the level of customer funds in their simple savings accounts.
Now, again assuming those funds are simply being held with the RBNZ—earning returns of 4.25% p.a.—this table looks at how much of that is being passed on to bank customers with those simple savings accounts vs. how much the banks are keeping for themselves.
So, of the $390 million in returns earned on that (relatively small) proportion of Kiwi savings, our three biggest banks are keeping over $240 million for themselves, while passing on just $138 million to their customers.
I’ve said it before and I’ll keep on saying it until I see demonstrable change. NZ’s big banks make their super profits by holding deposit return rates down, not by ‘over charging’ on lending interest rates.
We’re not a bank (or quite that big…yet 😏) but if that $9 billion were to be held in the Squirrel On-Call account instead, here’s what the numbers would look like:
When you see it laid out like that, wouldn’t it be interesting to hear the CEOs of ASB, ANZ, and Westpac defend the thought process around how they set their simple savings interest rates?
For now, the good news is that there are other players already working to drive greater levels of competition in the savings space
A handful of NZ-based fintechs (Squirrel included) have launched their own savings products in recent years, providing even better value for money.
If you’re looking for an alternative that’s going to get your money working harder, it’s worth checking out your options.
As these smaller players gain traction, they’ll eventually become large enough that the big banks will have to take notice—likely resulting in deposit rates going up, and causing them to increase lending rates as well to compensate.
In turn, higher lending rates will encourage wholesale funded lenders into the fray as we see in Australia.
As much as I like to point out problems, I also like to come up with potential solutions where I can
In recent years, we’ve seen the FMA adopt a hard-line approach to disclosure of fees for managed funds—particularly KiwiSaver.
It’s shone a light on some shoddy practices in the funds management industry, which has prompted various providers to respond with improved transparency, simplification of fee structures, and reduced fees.
When you get into the minutiae you realise the regime isn’t perfect, however things ARE better than they were.
The questions I’d ask is, could the same thing happen in the banking industry?
A mandate requiring savings account providers to show their margin against the OCR would provide a simple benchmark, and highlight the very issue I've pointed out above.
Might the Commerce Commission or RBNZ be interested in this? Or perhaps we could ask the team at Interest.co.nz to add an OCR column and margin to OCR column in their rate comparison tables?
What do you think? Feel free to let me know your thoughts – you can reach me on dave@squirrel.co.nz.