An alternative to term deposits
Claire Matthews examines the emergence of online savings accounts and asks whether they stack up.
Wednesday, 25 January 2006
by Claire Matthews
Traditionally, the best way to get the highest interest rate from a bank was by using term deposits.
This approach was challenged with the arrival of Superbank in early 2003, with its first product being the SuperSaver account, offering a high interest rate, equivalent to term deposit rates available at the time, while being on-call and with no minimum balance requirement.
Media reports have indicated that this product has been very successful for the bank.
More recently, a number of the main retail banks have launched similar high interest on-call accounts, apparently in competition with the SuperSaver account.
So how do these products compare, both with each other, and with the traditional term deposit accounts?
The accounts to be compared are Superbank’s SuperSaver, Westpac’s Online Saver, ASB’s FastSaver and ANZ’s Online Call Account.
At the time of writing other main retail banks have chosen not to compete directly in this product segment, although all have higher interest savings accounts available.
An important distinguishing characteristic with these accounts is that generally there is no minimum balance requirement. The exception is the ANZ offering, which has a minimum opening balance requirement of $2000, and no interest is paid if the account balance falls below $2000.
This can be contrasted with the minimum requirement for term deposits which is generally $5000, and with better rates available for balances of $10,000 and more.
The other important distinguishing characteristic of these savings accounts is that they are on-call, so the funds are available at any time they are needed by the depositor.
Term deposits, on the other hand, require the depositor to contract to leave the funds with the bank for an agreed term, from 30 days to five years.
Ready access to the funds is an important advantage for the depositor, if the interest rates are comparable. In general, depositors have a preference for liquid, ie: accessible, deposits even if they do not anticipate needing the funds in the foreseeable future.
This can be seen in that as at 31 July 2005 62.5% of the term retail funding of registered banks had a maturity of less than 90 days, and just over 4% had a maturity of 12 months or more.
The common complaint of bank customers relates to the fees they are charged. This is another area in which these accounts do well.
None of the accounts has an account maintenance fee of any kind, nor are there any transaction fees. However, in part this reflects restrictions on the way in which these accounts can be accessed.
All these accounts can be accessed via the banks’ respective Internet and phone banking services, but this access is generally limited to making enquiries and transferring funds.
Superbank and ASB allow transfers to one specified account at another bank as well as the depositor’s other accounts with the bank, but Westpac will only allow transfers to a transaction account at Westpac.
No EFTPOS access is available at any of the banks. ATM access is not available at the ANZ or Superbank, while ASB and Westpac limit ATM access to balance enquiries and funds transfers.
The big question is how well the interest rates stack up?
ANZ’s Online Call Account pays 6.50% pa, but only on balances of $2000 or more.
Westpac’s Online Saver has tiered interest rates, starting at 4% pa up to $10,000, 6.4% pa for $10,000 to $49,999, 6.5% pa for $50,000 to $99,999 and 6.6% pa for $100,000 and above.
In the current interest rate environment these are attractive interest rates. In a term deposit, you would need to have at least $10,000 invested for a term of 5-18 months at the ANZ to match their rate.
Similarly, at ASB you would need to invest a minimum of $10,000 for a term of 6-24 months to match their rate.
Even at Westpac, to match their minimum tier of 4% pa, an investment of at least $5000 would be needed for a minimum term of 90 days.
Superbank, of course, doesn’t offer term deposits.
The added advantage with the rates offered on these savings accounts is that the interest is paid monthly, whereas on terms deposits for less than one year, interest would generally only be paid on maturity.
For longer terms, the most frequent period for interest to be compounded would be quarterly.
The monthly compounding of interest can make a substantial difference to the actual interest earned, particularly for longer terms and larger deposits, even if the rates are the same. It could also offset at least some of the difference if the term deposit rate is higher.
Superbank offers a useful calculator on their website that allows the interest earned on a term deposit rate to be compared with what would be earned with the SuperSaver for the same period of time.
For a number of years the banks have offered more traditional savings accounts, on which it has been possible to earn interest rates approaching term deposit rates.
However, these rates have been subject to special conditions, such as limits on withdrawals and minimum deposits.
These new accounts would appear to offer significant advantages, offering higher interest rates with no special conditions albeit with minor restrictions on accessibility.
Media reports indicate that this new class of savings account has been popular, and it is worth noting that between December 2004 and July 2005 the “Other call” category increased from 10.7% to 13.4% of total retail funding for registered banks.
The savings accounts discussed here offer a very attractive option for depositors, combining high interest with accessibility, and provide a real alternative to term deposits.
Claire Matthews is Senior Lecturer in Banking at Massey University. The original version of this article appeared in the Chartered Accountants Journal.
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