The Australian Competition and Consumer Commission (ACCC) has released a report on the retail deposit market, calling for reforms to improve competition and consumer outcomes. The report found that banks use pricing strategies and product design to reduce the cost of their deposit funding, while creating barriers for customers to switch to better deals.
Banks exploit consumer inertia and biases
The ACCC report, which was commissioned by Treasurer Jim Chalmers in May 2023, analysed the behaviour of banks in the retail deposit market, which accounts for about 40 per cent of banks’ total funding. The report found that banks segment their customers through product design and conditional rates, leading to significant differences in rates between products, even within the same bank.
The ACCC said that banks exploit consumer inertia and other biases, such as loss aversion and complexity aversion, to keep customers on low-interest products. For example, banks offer bonus accounts that require customers to meet certain conditions, such as a minimum deposit each month, to receive a higher interest rate. However, the ACCC found that 71 per cent of these accounts did not qualify for the bonus interest rate on average each month, based on analysis over the first six months of the year.
The ACCC estimated that customers could be missing out on hundreds of dollars in interest each year by failing to meet the bonus conditions or switch to a better product.
ACCC recommends reforms to boost competition and transparency
The ACCC made seven suggestions to help customers get more out of their savings, including revisiting account portability to make it easier to move between banks. The regulator said that switching bank accounts and updating payment details is an inconvenience that discourages customers from searching for a better deal. The ACCC said that improved portability is worth considering given the advances in banking technology since the last time it was investigated in 2011.
The ACCC also recommended that banks do more to notify customers about product changes, such as interest rate cuts or changes to bonus conditions. The regulator said that banks should alert customers if they are about to lose entitlements to their bonus interest, for example by withdrawing too much or too often in a given month.
Furthermore, the ACCC called for more transparency around bonus accounts, such as disclosing the average bonus rate paid to customers and the proportion of customers who qualify for the bonus rate each month. The regulator also suggested that comparison sites should be more transparent about their commercial relationships with banks, and disclose how they rank and filter products.
ACCC calls for a new Consumer Duty for financial institutions
The ACCC also supported the introduction of a new Consumer Duty for financial institutions, which would require them to act in the best interests of their customers and offer fair value for the products and services they provide. The ACCC said that a Consumer Duty would complement the existing regulatory framework and address some of the issues identified in the report.
The ACCC said that a Consumer Duty would help to ensure that customers are not disadvantaged by complex and opaque products, and that banks are held accountable for their pricing and product design decisions.
The federal government will release a formal response to the report next year. The report is part of the government’s ongoing efforts to promote competition and consumer choice in the banking sector, following the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
