Why do banks keep doing this to savers?

Earlier this week, Heartland Bank launched a shiny new addition to its suite of savings products — the Digital Saver account.

It offers a 5.00% p.a. interest rate, and you don’t have to jump through any hoops to earn that rate either*. You get one free withdrawal every month, then after that every withdrawal comes with a $4 charge.

(It’s a pretty hefty fee considering it’s a digital account, so all processing is done electronically, but Heartland has — at least — waived the charge for the remainder of this year.)

So, that all sounds pretty good, right? But there’s something kind of weird about Heartland launching this new account.

And that’s the fact that it already has an account among its existing suite of savings products, the Direct Call Account, which is practically identical — paying interest of 4.60% p.a. and with no fees.

So, why go to the trouble of launching a whole new product, instead of just increasing the interest rate on its existing one?

My hypothesis: we could be about to see a classic case of ‘grandfathering’ in action

Grandfathering is a practice where a bank brings a “sexy” new product to market every few years, that’s not dissimilar to an existing account it has on offer.

Then, the old product — which by the way, was also sexy and shiny and new when it first launched — is gradually made less attractive over time, usually by decreasing interest rates.

This stuff happens all the time. It was my job at various points in my banking career. And it’s all for the banks’ benefit.

Here’s how I expect things to play out in this scenario: 

1. Heartland has launched its snazzy new account, Digital Saver, with a really attractive interest rate — and a small gotcha (the $4 fee)
2. From here, the bank will pour lots of energy into rapidly building balances in this new account. A natural part of that will involve existing customers moving from other Heartland Bank accounts.
3. Then, over time, Heartland will reduce the interest rate on its old Direct Call Account — to the detriment of ‘rate-insensitive’ customers, or customers that never quite get round to moving their money. As they do so, the margin the bank makes on any money in the old account will increase, so it’s benefitting from that customer ‘inertia’.

The whole process usually plays out over a few years, but in this case I expect we’ll start to see it swing into effect sometime in 2024.

Playing fair

My guess right now is that Kiwi have over a billion dollars saved in Heartland’s Direct Call Account.

The fair thing for Heartland to do right now, would be to offer to migrate all of its Direct Call Account customers to the new Digital Saver account. And lessen, or remove, that $4 transaction fee.

At the bare minimum, Heartland has a responsibility to communicate with every Direct Call Account customer to let them know about the new product — and help them decide whether moving to the new account makes financial sense. That could even involve providing an analysis, based on that specific customer’s behaviour, as to which account would be best for them.

And they should do this at least annually as customer situations (and the terms of each account) change.

And in the meantime, here’s an analysis of the best and worst bank savings accounts in New Zealand to find out who is playing fair.

* It’s worth noting that when you make a withdrawal from the Digital Saver account, that request must be received by 7:00pm. If your transaction account sits with another bank, funds will be transferred overnight — meaning they will only be available to access early the following day. The service is available seven days a week.  

Figures are accurate as at 17 October 2023.