Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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29 May 2023
Financial Services Competition Division
Australian Competition & Consumer Commission
By email: fscompetit[email protected].au
To whom it may concern,
Retail deposits inquiry 2023
The Australian Banking Association (ABA) is pleased to make this submission to the Australian
Competition & Consumer Commission’s (ACCC’s) Retail Deposits Inquiry 2023 (the Inquiry).
Australian banks continue to provide a competitive, dynamic, and innovative marketplace for deposits.
Banks are cognisant of the variety of uses for deposit accounts and strive to provide products and
services that meet the needs of customers.
Banks offer a range of deposit products, such as feature-rich transaction accounts that offer seamless
options for Australians to undertake commerce, flexible savings accounts that encourage and support
savers to reach their goals, and term deposits to provide a safe place to deposit funds that are not
immediately required by customers. Since the Reserve Bank of Australia (RBA) started increasing the
cash rate in May 2022, banks have also increased the interest paid on savings accounts and term
deposits.
In pricing deposit products, banks balance a number of factors such as product features, the stability
(tenure) of the deposits, the cost of money, and competitor positions. However, banks also consider
deposits pricing in respect to the broader activities of the bank. This includes the interrelationship of the
price of mortgages relative to the price of deposits as customer deposits form a significant portion of
banks’ funding. Bank deposits as a source of bank funding have grown substantially since the GFC,
now accounting for around 60 per cent of bank funds.
The value customers receive from deposit products is broader than just the interest rate. Banks have
innovated both savings and transactions products for well over 50 years. Each innovation has provided
banking customers different options to access to their funds and for transactional needs (e.g.,
transaction rounding up, budgeting tools, savings goals and trackers) or options to reduce their
mortgage interest expense (e.g., by putting their cash to use against their mortgage in offset accounts).
Innovations and other services, like fraud and scam prevention, are incorporated into the features of
deposit products as standard offerings with associated costs which aren’t passed on to consumers.
Banks continue to develop the savings and payments infrastructure of the nation, providing opportunity
for industry and emerging technologies to further innovate.
Yours faithfully
Anna Bligh A.C.
Chief Executive Officer
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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Annexure
1. Types of deposit products
Deposits are an essential component of bank funding. Bank funding comes from deposits, long- and
short-term debt (borrowings), equity and securitisation. Of these, domestic deposits account for the
majority of bank funding, having grown to over 60 per cent of bank funds in 2022, up from around 45
per cent in the late 2000s.
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There are three basic types of deposit product: transaction accounts, savings accounts, term deposit
accounts. Each type of deposit product meets specific customer needs and preferences through
product features, Table 1.
Table 1: Deposit products available to Australian consumers
Deposit product
type
Customer need met
Core features
Transaction
Account
A deposit facility to receive income
and other deposits and from which to
conduct everyday financial activities
such as paying bills, shopping for
groceries, entertainment etc.
These accounts have a high cash
flow rate, often being ‘topped up’ at a
pay point and depleted until the next
pay cycle.
Customers demand instant access to
funds (EFT or cash), speedy
payments processing.
Funds are held at call; customers can
access instantly.
These accounts offer full service such
as EFT, BPAY, PayID, PayTo.
Savings Account
A deposit facility to enable savings.
Customers use these types of
accounts to build up a pool of
savings for a goal (e.g., house
deposit or car purchase) or as good
financial management practice.
Funds are held at call; customers can
access near-instantly.
Accounts usually cannot be linked to a
debit card.
Direct debits are not possible for many
products.
These products may provide the ability
to transact however a larger benefit
generally accrues through higher
savings.
Term Deposit
A deposit facility to invest funds that
are not immediately required.
Customers are willing to commit
funds for a term in exchange for
commensurate compensation.
Funds are typically held on deposit for
an agreed period.
Customers cannot add to the funds
during the period.
Customers can recall funds before term
subject to notification requirements.
Australian savers are not restricted to bank savings accounts and term deposits to store savings and to
earn a return. Alternatives to savings or term deposit accounts that may generate income include fixed
interest securities, investment grade bonds (e.g., Australian Government bond), cash management
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RBA, 17 March 2023, Developments in banks funding costs and lending rates, Accessed 4 May 2023
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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Offset accounts offer customers a financial benefit relative to other forms deposits. To illustrate the
benefit from offset accounts, the above example is extended with the following assumptions:
• the person is earning a salary of $100,000 per annum with a marginal tax rate of 32.5 cents,
and
• instead of offsetting the mortgage balance, the person places the $50,000 into a 12-month
Term Deposit at 4.7%.
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Under this scenario, the net interest benefit to the customer is $1,586.25
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at the end of the twelve-
month contract period.
In comparison in the scenario where the $50,000 is offsetting the mortgage, interest saved under the
offset arrangement was the $3,345. Therefore, the customer achieves a $1,785.75 benefit under the
offset arrangement relative to the Term Deposit in the 12-month period.
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Savings products
Bonus savings accounts
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typically offer higher interest if the customer or account meets certain
conditions (e.g., a specified amount is deposited each month, or a customer belongs to a particular
demographic). During the recent period of a rapidly rising target cash rate, bonus saving products
showed a similar rapid increase in interest rates.
The average interest paid in March 2023 on bonus savings accounts was 4.20%, offering a premium of
60 basis points over the cash rate. Based on data from RBA statistical series F4, interest for bonus
savings accounts grew at a faster rate throughout late 2022 than online savings accounts, Figure 1. Of
the 609 savings products on the market (162 of which are also classified as a transaction account) 158
have conditional bonus.
Figure 1: Retail deposit interest rates, Savings accounts, January 2004 – March 2023, %
Source: RBA Retail deposit and investment rates – Statistical series, Table F4; ABA analysis
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Rate based on AMP Bank offer of 4.7% on 12 month Term Deposit, https://www.canstar.com.au/compare/term-
deposits/?amount=$50,000&profile=Personal&term=11+-+24+months ABA accessed 18-May-23
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This calculation is undertaken as follows:
• Interest income is $2350 as calculated by Canstar https://www.canstar.com.au/calculators/term-deposit-calculator/ ABA accessed 18-
May-23
• LESS Income Tax of $763.75 at the marginal rate of tax of 32.5 cents
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This example has been simplified and does not consider the complex financial situations of bank customers. It is intended for illustrative
purposes only.
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Bonus savings accounts are distinct from accounts that offer introductory rates.
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Banks bonus savings account Cash rate Online savings account
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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Term deposits
There were over 130 term deposits products available in Australia as at May 4, 2023.
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Variations in
features offered in these products include online accessibility, minimum or maximum deposit values as
well as access to funds. For example, some products can be applied for, opened and closed online,
allowing greater flexibility for customers. Minimum and maximums amounts deposited and early access
to funds
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or funds at call without penalty are also features that are offered for some term deposits but
not others.
Figure 2 uses RBA statistical series F4 to illustrate the average interest paid on one-month, six-month
and three-year term deposits, with longer terms nearly always offering high interest. This allows banks
the ability to access secure medium-term funding by providing higher interest in return for access to
longer term deposits.
Figure 2: Interest rates for bank term deposit products and Cash rate target, by term length,
January 2006 – March 2023, %
Source: RBA Retail deposit and investment rates, Table F4; ABA analysis
A factor driving term deposit pricing is the term structure of interest such as Bank Bill Swap Rates
(BBSW). During the recent period of a rapidly rising cash rate, longer term deposit and bonus saving
products show a similar rapid increase in interest rates, Figure 3.
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Canstar View, https://www.canstarview.com.au/, Accessed by ABA 4 May 2023.
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Longer duration term deposits are usually subject to a 30-day notice for customers to access funds ahead of the contracted date to fulfil
requirements under APRA Prudential Standard APS210 Liquidity)
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Cash rate target TD: 1 month TD: 6 months TD: 3 years
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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Figure 3: 6-month bank bill swap rate and 6-month and 3-year term deposit rate, August 1990 –
March 2023, %
Source: RBA Retail deposit and investment rates, Table F4; RBA Interest rates and yields – Money Market, Table F1;
ABA analysis
3. Pricing of deposit products relative to mortgage products
We note the Inquiry’s concern for the rate at which deposit rates change following a movement in the
target cash rate by the Reserve Bank of Australia. We also note that while the issue of increases to
mortgage interest rates is not discussed in the Issues Paper, it is integral to overall bank balance sheet
management.
As outlined in sections 1 and 2, deposits are an important source of funding for banks. Banks utilise
their funds to issue loans, such as mortgages and business loans to their customers. Therefore, the
pricing of deposits impacts other elements of the banks’ activities, including the pricing of mortgages.
Banks must balance the pricing of all products while managing liquidity, capital, operating costs as well
as competitive pressures.
During 2022, the average interest rate paid on bonus savings deposit products increased more than
both the cash rate and average interest charged on mortgage products.
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This is best illustrated by
examining the increase in the average effective interest rates of deposit and mortgage products.
Using RBA statistical series F6, Figure 4 shows that the effective interest rate paid on bonus savings
account increased by more than the cash rate between April 2022 and March 2023. Both rates, as well
as 3-year term deposit rates increased by more than effective interest rates on variable owner-occupier
mortgages.
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While there was a 3.50 per cent increase in cash rate during this period, there was also
an average 3.95 per cent increase on the interest in bonus savings accounts and 2.95 per cent
increase in 3-year term deposits.
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Bonus savings accounts are distinct from accounts that offer introductory rates.
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UBS analysis finds there is expected to be strong competition between banks for deposits throughout 2023; UBS, March 28, 2023, Australian
Banking Sector Update, How low can we go?, UBS Evidence Lab.
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Bank Bill Swap Rate 6-month term deposit 3-year term deposit
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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Figure 4: Increase in effective interest rates between April 2022 and March 2023, by product
type, %
Source: RBA Retail deposit and investment rates – Statistical series, Table F4; RBA Housing Lending rates – Statistical
series, Table F6; RBA cash rate; ABA analysis
4. Switching deposit accounts
To take advantage of more attractive interest rates and earnings, bank customers can easily open fee-
free bank accounts and move funds within minutes. This applies for a range of scenarios, including
opening new accounts with a new bank, new accounts with a customer’s existing bank, or moving funds
between existing accounts at a customer’s existing bank.
In most cases, moving funds is a simple and quick process and at no cost to the customer. Consumers
are also able to easily access price comparisons via a range of websites. These companies advertise
and compare the different rates on offer across all the banks.
Technology also enables a consumer to switch banks and accounts quickly. Combined with banks
enabling customers to open accounts online quickly, the New Payments Platform can almost instantly
move funds into a new account.
5. Innovations in deposit products and related services
Banks constantly evolve product and service offering at great investment. All technologies have a
lifespan driven by subsequent innovations and evolving consumer preferences. As part of the free and
competitive marketplace, banks are to be encouraged to continue to find opportunities to further
innovate and deliver the services and products customers’ demand whilst retiring technologies that
have been superseded or are no longer preferred by consumers.
In respect to savings accounts, banks have been at the forefront of innovating with high interest online
savings accounts and through the development of savings aligned applications such as budget and
spending trackers.
In respect to transaction accounts, banks have driven innovation in payments for well over 50 years
with the introduction of in Bankcard in 1974, wide-scale bank deployment of ATMs in the 1980s,
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Cash rate Bonus savings rate 3 year term deposit New mortgages Outstanding
mortgages
Australian Banking Association, PO Box H218, Australia Square NSW 1215 | +61 2 8298 0417 | ausbanking.org.au
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EFTPOS in 1984, BPAY in the late 1990s, through to innovation of offset accounts in the early 2000s,
bank apps from 2010,
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and PayID and PayTo in 2018.
Over the last few years, many innovations have bene introduced in payments, such as the launch of
NPP and Open Banking under the Consumer Data Right (CDR). These features are essentially free for
customers to use, reducing friction of moving funds around and paying for purchases. Banks continue
to enhance their transaction account offerings in an environment of reducing account fees, Figure 5.
Figure 5: Transaction / deposit account service fees, All ADIS, September 2004 – December
2022, $m
Source: APRA Quarterly ADI Statistics, Tab 1a; Analysis by ABA
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https://www.itnews.com.au/news/stgeorge-nab-to-launch-ipad-banking-apps-176137
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