Bank customers lose out as industry holds on to rate-hike gains
IT IS generally accepted that there is mystique around the banking and finance industry. People see that as the status quo and chalk it up to the industry being too complicated and difficult to understand. This opacity is perceived as normal, “the way it has always been”.
This can be dangerous, as it allows banks and brokers a veil behind which to hide and reap disproportionate benefits at the expense of consumers. While not a recent phenomenon, a case in point has been playing out right below our noses all year. Financial institutions are retaining the benefits of central bank rate hikes, with many not passing this on to their clients.
As central banks all around the world raise interest rates to manage the current inflationary environment, financial institutions exploit the larger spread between the interest they pay their customers, which has remained stagnant or has increased only marginally, and the profits they earn by investing, which have increased disproportionately.
This is not just a global phenomenon or something happening far away. Globally, central banks have raised rates frequently over the past year to curb inflation. Similarly, the Monetary Authority of Singapore has tightened its monetary policy for the fifth consecutive time in October 2022 since the previous year. The intention is to lower inflation and aggregate demand in the economy. For example, with higher interest rates, saving money as opposed to spending it would appear more attractive as you expect to get higher returns on your savings.
Yet, many banks will only offer reasonable rates for deposits with a minimum lock-in period. Currently, the best rates for fixed deposit accounts are around 3.5 per cent per annum, with a minimum lock-in period ranging from three months to 12 months. Meanwhile, the majority of Singaporeans keep their money in savings accounts, where the average base interest rate is only 0.13 per cent.
During the last earnings season, we saw record profits being reported, as the surge in interest rates became a key factor driving that growth. However, some Singaporeans seemed surprised at this result – having heard that markets have been weaker and amid talk of recession, many could not wrap their heads around why banks were earning more. While the logic is clear to those of us in the industry, it might not be immediately visible to people outside of the industry, even though it has tangible implications for everyone.
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The issue at hand is when financial institutions fail to pass these higher interest rates on to customers. Admittedly, interest rates are not the most interesting subject to discuss over dinner and might even seem esoteric to most, but if we don’t talk about these things, how would we expect people to know and see the impact on their lives?
While it goes without saying that financial institutions must make money, where it becomes unhealthy is when the chasm between the profits of the industry and what accrues to the customers widens disproportionately in hard times at the expense of the latter. I believe the industry can do better for consumers, and it will involve a reframing of perspectives to pursuing and prioritising win-win, where everyone recognises it does not have to be this way and believes a dual-win is possible. Sometimes, all it takes is reading an article like this to become aware and then looking for better.
There are many financial institutions holding on to rate hikes and reaping the benefits, but there are also many that have policies and campaigns in place and have showed commitment to passing the gains on. Once consumers become enlightened and know what they are looking for, it is usually easier for them to find it.
The writer is CEO of Asia-Pacific at Saxo
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