Submission to the Inquiry into Competition in the Banking and Non-Banking Sectors 3. Deposit Market

A second important element of retail banking is the market for deposit accounts, with these accounts used for both savings and to make transactions. Like the housing market, competition in this market has strengthened over the past decade. An important driver of this competition has been the entry of foreign banks offering high-interest online accounts, while more recently, the banks' strong demand for deposits as an alternative source of funding to capital markets has also been a factor.^[6]

The role that foreign banks have played is evidenced by the more than doubling over the past decade in their share of total deposits, to 18 per cent, with strong growth in their shares of both business and household deposits (Graph 6). In contrast, the five largest banks' share of total deposits has been fairly steady over this period at around 70 per cent, with acquisitions of several regional banks offsetting losses in their underlying market share. The market shares of the smaller Australian banks and the credit unions and building societies have both declined since the mid 1990s.

The most common form of deposit account is a transaction account; in total, there are almost 30 million of these accounts in Australia, and they constitute around 15 per cent of the value of total household deposits. Transaction accounts normally charge a fixed monthly account-keeping fee (typically $4–$6), with some institutions waiving or discounting fees for pensioners, students and home loan customers. Some institutions also charge fees on a per-transaction basis, but this has become less common over recent years, particularly for transactions that are made electronically. The interest rate on most transaction accounts is close to zero, however over recent years a small number of banks have introduced transaction accounts that pay a higher rate of interest (around 5 per cent currently) provided that deposits of at least a specified size are made each month.

In terms of variable-rate savings accounts there are three main types of accounts: bonus savings accounts; cash management accounts; and on-line savings accounts.

Bonus savings accounts typically pay a higher rate of interest than transaction accounts if at least one deposit and no withdrawals are made each month (Graph 7). These accounts were introduced in the late 1980s, and are now offered by a wide range of institutions. Similarly, cash management accounts, which are also offered by most institutions, have been around for a number of decades. Most offer a tiered interest-rate structure, with interest rates rising with the account balance. Bonus saver, cash management and other branch-based savings accounts together comprise about 25 per cent of total household deposits.

The fastest growing form of savings account has been the high-yield online accounts. These accounts typically offer an interest rate that is around the cash rate. They were pioneered by the foreign-owned banks in the late 1990s, with the Australian-owned banks subsequently introducing similar accounts after their share of the household deposits market started to decline. These accounts typically have no fees and generally do not have a minimum balance requirement, and they typically cannot be used to make payments other than to transfer funds to and from a transaction account. It is estimated that these accounts comprise about 20 per cent of banks' household deposits.

The other main type of deposit is a term deposit, with these deposits accounting for around 40 per cent of all household deposits. Most term deposits have maturities of 1 year or less, and the interest rates typically move with 3–6 month bank bill rates. In pricing these deposits, it has become common for banks to offer short-term ‘specials’ for particular maturities, with the ‘special’ rates being at least equivalent to money-market interest rates with a similar maturity. Depositors with flexible investment horizons are able to take advantage of these specials, but given that the maturities to which they apply change regularly, households must take care to avoid funds being rolled over into a deposit with the same term but a much lower interest rate at maturity. Over the past six months, competition for term deposits has increased considerably as banks have sought alternative sources of funding to wholesale markets. Reflecting this, the value of term deposits held in banks by the household sector has increased by over 35 per cent over the past year.

While financial institutions have introduced a variety of fees on deposit accounts, total fees relative to the value of outstanding deposits have declined slightly over recent years. The Reserve Bank's annual Bank Fees Survey shows that banks' annual fee income from household deposits (which includes account-servicing fees, transaction fees and other fees) has fallen from 0.65 per cent of the value of outstanding deposits in 2000 to 0.55 per cent in 2007 (Graph 8). Fees on business deposits have fallen more sharply, dropping from 0.55 per cent to 0.35 per cent over the same period.

Footnote

Reserve Bank of Australia (2007), ‘Box C: Foreign-owned Banks in Australia’, Financial Stability Review, March. [6]