Westpac New Zealand CEO Catherine McGrath says she doesn't know how much money the bank makes from accounts that pay customers no interest.
Appearing at the parliamentary banking inquiry on Wednesday, McGrath was questioned by Labour Party Finance Spokeswoman Barbara Edmonds about the contribution to Westpac NZ's profitability from paying low or no interest on customers' money.
Edmonds pointed to last year's Commerce Commission market study, which noted the big four banks plus Kiwibank held more than $58 billion in deposits not bearing interest. Contrasted with market lending rates, this contributes to overall profitability, particularly in a rising interest rate environment, the Commission said.
"So that's around $11,000 per New Zealander. So using that calculation and the funds transfer pricing method, we think that generates around a 5% interest margin. So that's around $3 billion for the big five banks," Edmonds said.
"Can you provide the amount that's generated in your interest margin, and if the funds transfer pricing around 5% is not right, what is it for your bank?"
McGrath said funds transfer pricing is commercially sensitive and takes into account "many other factors," adding she wouldn't talk about it at the inquiry. She said about 15% of Westpac NZ's deposits were unremunerated.
McGrath said if customers are holding more than $5,000 in a non-interest bearing account Westpac NZ sends them a notification suggesting they should think about putting it into some form of savings.
"And we've sent over 137,000 of those in the last short while. So I'm quite comfortable that we're helping customers to use their money as effectively as possible."
Asked by Edmonds how much profit Westpac NZ generates from unremunerated accounts, McGrath said she didn't know.
"I don't have a specific number for that," said McGrath.
"What I think is really important is that proactive engagement with customers about is your money in the right buckets? And so I think by doing that, I feel very comfortable that there are not inappropriate profits that we are earning from amounts of money that people are inadvertently leaving in the wrong account."
The Commission said transaction deposits are largely derived from the main bank relationship where consumers do most of their everyday banking.
"The higher proportion of transaction deposits held by the larger banks reflects the strong position they have in main bank relationships. While a significant proportion of the deposits are on call, we have found that consumer switching rates are very low and therefore these deposits are reasonably stable," the Commission said.
"Although on-call deposits may have a fluctuating balance for individual accounts, when aggregated across a large customer base, they provide a bank with stable funds that are often as sticky as the customer relationship. During the recent period of rising interest rates, consumers have shifted some deposits away from low (or no) interest call accounts towards higher-return term deposits."
"Nevertheless, the balance of deposits not bearing interest remains high. This is likely to reflect a high proportion of transaction deposits that consumers access for day-to-day banking and therefore cannot easily be stored in an interest bearing account. Where deposits are not bearing interest and not used for day-to-day banking, there is an opportunity for consumers to engage in the market and earn an interest return and an opportunity for services that can support this," said the Commission.
"The nature of the funding advantage to large banks from retail deposits is an issue that is inherent in personal banking and a common feature observed in the UK and Australia. Some submissions proposed recommendations regarding the lack of interest payments on transaction deposits. One suggested banks pay interest on all deposits, including transaction deposits, at a market rate, at least the cash rate."
"Consumer NZ suggested a consumer duty similar to the UK, which requires firms to be able to evidence fair value of their products and services, stating that this would require banks to justify low or no interest on deposits as fair value. We have focused our recommendations on measures to reduce barriers to competition more generally rather than specific proposals to reduce the funding advantage," the Commission said.
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