Why Aussie savers are missing out on the best interest rates

Two in three savers are missing out on bonus interest and most haven't switched accounts in years. So is the savings landscape ripe for change?

The money being kept in savings accounts, term deposits and other deposit accounts isn't delivering the kind of returns that it could be, a report on retail deposits published by the Australian Competition and Consumer Commission (ACCC) last month has highlighted.

Australians have a touch over $1.4 trillion stashed away in deposit accounts according to the latest data from the Australian Prudential Regulation Authority (APRA).

But because banks rely on these deposits for roughly 30% of their funding needs, the ACCC notes, they have an interest in minimising the amount of interest they pay out to their customers.

The report found that factors such as complex interest rate pricing, onerous account conditions and barriers to switching from one bank to another, are limiting the number of savers earning the highest interest rates possible.

"While high headline interest rates may seem attractive to customers, they can come attached with conditions that are hard for customers to meet and keep track of," says ACCC chair, Gina Cass-Gottlieb.

"Our report has recommended measures to make it easier for customers to get the most out of their savings and move to retail deposit products that better meet their needs."

Savers fail to earn bonus interest 

One product that the ACCC has identified as being ripe for improvement is savings accounts with bonus interest rates. These rates are generally quite high, but are only activated once the monthly conditions attached to them are met.

For example, a saver might have to deposit $1000 into their account or make five transactions with a linked debit card each month before the bonus rate is activated. However, if the requirements aren't met the account holder will only receive the typically much lower base rate.

As the ACCC discovered, plenty of savers with bonus rate accounts are missing out. Over the first six months of 2023, 71% of savings accounts with a bonus interest rate didn't actually receive it, on average, each month.

To improve this the watchdog has recommended that banks be required to alert customers if they're about to miss out on a bonus rate by not fulfilling the conditions, and that banks publish figures on the number of savers who actually activate bonus rates.

Andy Kelly, the deputy director of campaigns and communications at consumer group Choice says that while these measures could help, they would like to see a savings account market where higher rates are far simpler to access.

"Requiring banks to alert consumers if they're about to lose their bonus rate will help stop some consumers accidentally losing their interest. Mandatory bank reporting on the number of savers losing their bonus interest may also pressure the banks to offer better deals.

"But there's no justification for base interest rates as low as 0.01% just because you had to pay an unexpected bill, so we'd like to see banks offer accounts with fair interest rates without the onerous conditions attached."

More broadly, the ACCC has suggested that banks should also directly alert customers to any changes in interest rates and then prompt them to consider switching to an account with a higher rate. Again, Kelly agrees, but argues that banks should go even further.

"Banks should be required to automatically switch consumers to the best interest rate they offer, or at a minimum clearly disclose the best rate available, so customers aren't penalised for their loyalty."

Could open banking make it easier to switch?

Beyond interest rates, the report recommends that the government reviews the options available to make switching from one bank or savings account to another both simpler and faster - what is called 'account portability'.

Why does this matter? Well, the ACCC found that, "despite there often being a range of alternative products offering better interest rates and conditions", very few people switch banks because of the time in takes and the effort involved setting up contacts and direct debits again.

In a survey conducted for the report, only 11% of respondents said that they had changed their main transaction account to a new bank in recent years while 16% had changed their main savings account.

Why haven't customers switched accounts in the last three years?

One of the initiatives highlighted by the ACCC that could lower the barriers involved with account switching is the Consumer Data Right (CDR) and open banking.

Simon Docherty, chief customer officer of fintech Frollo, explains that at the moment accredited CDR participants can do things like recommend customers better savings accounts that might be on the market, but they can't do the legwork and help them make the switch. A component of CDR called 'action initiation' could change this though.

"Take somebody who's got a savings account with CBA. You could look across the market for them and say, 'You can get a better deal with ING, are you happy for us to open that account for you?', then if they give you consent you go ahead and do that."

"Or a consumer could say, 'Here's access to my data for 12 months. Every three months I want you to find the best product in the market and shift all of my savings, all of my direct debits and all of my details across there'. That will make things much more real in terms of bank account portability."

The snag is that Australian savers may need to wait a few more years before the possibilities of action initiation come to light.

"Action initiation isn't likely to be in market until 2025 - probably late 2025. And then the banks will need to come along for the journey in terms of implementing it and making sure that they're part of that process is workable," Docherty says.

Get stories like this in our newsletters.