Today, we’re excited to chat with Maxime Chaury, one of the co-founders of Upworth, a platform that’s transforming how Australians manage their savings. Max’s deep dive into the hidden pitfalls of savings accounts reveals just how much potential earnings we might be leaving on the table. With Upworth’s personalised insights, he’s on a mission to help everyday Aussies maximise their savings efficiently.
In this interview, Max shares eye-opening statistics about the savings industry and offers practical advice on navigating the often confusing landscape of savings accounts. From understanding different types of interest rates to recognizing the psychological biases that affect our financial decisions, Maxime provides a wealth of knowledge to help you take control of your savings.
Maxime, can you share some key numbers from the savings account industry? How does the ~$30 billion in annual interest earnings impact the average Australian?
Definitely, the numbers are impressive and impact the average Australian. We are collectively missing ~A$30bn in interest earnings every single year in Australia, that means an average ~A$1,474 per Australian adult per annum (that is, without even taking into account the transfer of household deposits to higher-yielding offset accounts, held by 60% of Australian mortgage holders). It represents an average loss of A$8,228 per adult over 5 years.
What’s more, Household deposits represent a growing ~$1.47tn money pool (+6% p.a. over the past 10Y, up from ~$0.83tn) that is increasingly critical for bank funding (~30% of their total funding, almost x2 vs. 2008).
That’s because deposits are amongst the best kind of money banks can hope for: they are cheaper, more stable sources of funding that also carry the expectation of future profits through a long-term relationship with the clients – us!
The Big Four banks control a significant portion of our deposits. How does this concentration of power affect the interest rates and options available to consumers?
Indeed as of today, the big 4 banks control a disproportionate ~73% of our deposits (APRA data as of April 2024). But competition exists. It is up to us to individually retake control and play the banks instead of being played by them.
The savings account landscape is broken in a least four main ways:
- There are wide discrepancies in annual interest rates on offer between banks. You could pick up the worst of the worst with a 0% annual interest rate (you read well) or earn 5.75% p.a. – see exhibit 1 below where we plotted 40 selected savings accounts from ~30 banks as advertised online in mid June 2024 for account balances of $5,000;
- At times, there are variations between the interest rates on offer inside the same bank with no objective reason. For instance, compare Rabobank´s High Interest Savings Account paying 4.40% base rate up to a $250,000 balance and Rabobank´s PurposeSaver paying 3.40% up to a $250,000 balance. You picked the PurposeSaver? Too bad
- Complex product design makes it hard to compare products. All savings accounts are not created equal and the headline interest rate is a very different concept from the effective interest rate an individual earns. Base rate, bonus rate and introductory rates all come in the mix.
- Frequent rate changes make it impossible to stay on top of the best conditions without a significant and often unrealistic ongoing time investment.
Chances are that you are not earning the interest rate that you think you are earning on your savings. “We found that 71% of bonus interest accounts did not receive the bonus interest rate on average each month over the first 6 months of 2023”. These words are from the ACCC´s Retail Deposit Inquiry.
Can you explain the different types of savings accounts, such as base rate, bonus rate, and introductory rate accounts? How do these differences impact the average saver?
Absolutely, there are 3 core concepts that everyone needs to know to win the savings account game: interest rate types, conditional vs. unconditional savings accounts and balance tiering.
1) Interest rates types
Think of the savings interest rates as a rocket ship made of several layers:
- Base interest rate – The most simple rate of all, paid to you no matter what;
- Bonus interest rate – The rate paid to you on top of base rate provided that you meet specific conditions;
- Introductory interest – A rate paid to you for a temporary amount of time (often a period ranging from 3 to 6 months) and typically reserved to new-to-bank customers or customers who have not held this savings account in the recent past (often 12 months). The introductory rate is higher than the interest rate paid afterwards;
- Headline interest rate – The total interest rate paid to you, summing the base rate, the bonus rate (if any) and the introductory rate (if any).
2) Conditional vs unconditional savings accounts
● A conditional savings account pays a headline interest rate made of a base rate and a bonus rate. The bonus rate is only paid if specific conditions are met per monthly period.
Fail to meet any of these requirements and you won’t earn the bonus interest rate and only pocket the base rate.
● An unconditional savings account, as the name indicates, has no condition and will pay you the base rate. Easy. Then why not always pick such an account? Well, banks design their savings accounts so that conditional accounts often have a higher and catchier headline interest rate, mostly dependent on the conditional bonus interest rate – that 71% of individuals fail to earn – with a low base rate.
3) Stepped vs tiered interest
Stepped interest – Banks will pay the applicable interest rate for the portion of the account balance that falls within a given tier. Under this payment mode, the account holder is paid a different interest rate for different portions of his balance, according to a pre-set grid.
Tiered interest – Banks will pay the applicable interest on the full balance based on the tier that the full balance falls in. Under this payment mode, a single interest rate is paid for the entire account balance. It is the balance amount that determines which interest rate will be paid according to a pre-set grid.
What are some of the key psychological biases, like status quo bias and present bias, that affect how people manage their savings accounts? How can being aware of these biases help individuals make better financial decisions?
There are five main biases that impact us when it comes to savings accounts. They are worth being aware of to make more informed decisions:
1) Status Quo Bias
We have a preference for what is in place, including when there are objectively superior options available.
In the context of savings accounts, we typically overestimate the effort required for change and underestimate the value of this very change.
2) Present Bias
We have a tendency to value the present over the future, including at the expense of long-term benefits.
For instance, the mental burden and time required to search and switch to a better savings account may dwarf the allure of future gains, irrespective of their magnitude.
3) Loss Aversion
We tend to perceive a real or potential loss as psychologically more severe than an equivalent gain. For instance, it costs us more to lose $100 as opposed to winning $100.
With savings accounts, it may mean weighing up the cost of searching and switching against the expected benefits from switching, such as a higher interest rate.
4) Overconfidence
We are prone to overestimating our chances of experiencing a better-than-average outcome. You may relate to that thinking in personal life with thoughts such as: “I know that statistically almost half of marriages end up in divorce but it won’t happen to me”.
For instance, we typically overestimate our ability to satisfy specific and consistent requirements to unlock a bonus interest rate.
5) Information Overload
When faced with too many options and an overload of information, we are typically overwhelmed. Rather than engage with complexity, we are likely to default to inaction.
Faced with different savings account types, subtleties about interest rates, balance tier concepts and so on, most of us simply shut down – and thus miss possibly significant benefits.
How can the Upworth Scanner help people make better decisions about their savings accounts? What are the key features that set it apart from traditional comparison websites?
Upworth helps everyone to make better decisions in a few essential ways. Its main difference with traditional comparison websites is twofold: being totally independent (i.e. not receiving any money from banks for clicks or account creation), and being able to provide much more personalised insights based on your specific situation and needs.
The main support you will receive:
- We will help you validate your current savings accounts to establish your baseline conditions;
- We then automatically compute your effective interest rate to establish the true picture of your earnings;
- We identify the best available rate across all available banks – not inside a given bank – considering your account balance. We show your extra gross interest earnings potential over 5 years;
- We alert you by email whenever a better rate is available.
- We automatically track your bonus rate achievement and send a personalised periodic report.
- We let you know the amount of time left before an introductory rate lapses and send you an alert when it expires.
- Additionally, you can decide to filter products the way you want to: conditional vs. unconditional, stepped vs. tiered interest payment type or by balance tier.
- Special conditions are highlighted in a clean way and an internet link to the product provider´s page is included.
Transparency is a big concern for many consumers. How does Upworth ensure complete transparency about commercial arrangements, and how does it help users monitor their accounts effectively?
We are very transparent about our savings accounts commercial arrangements: we have NONE. Nobody pays us to tell you which savings account to look at or how to look at it. We serve you;
Yet, as per the ACCC´s findings, comparison websites can be paid an average of around $10 per click. The ACCC notes that “products that are ‘sponsored’ are generally paying a higher cost per click amount in return for ‘top’ positioning in search results. In some cases, banks may pay a much more significant charge when a customer does follow through from a comparison website, to open an account; this charge can range from approximately $150–400 per acquisition depending on comparison website and bank.”
One feature of Upworth Scanner is real-time alerts. How do these alerts work, and how can they benefit someone looking to maximise their savings?
Absolutely, the interest rate you receive depends a lot of the time: miss the time to reach conditions and you will not receive your bonus rate. Past the initial honeymoon period of the introductory rate, your interest rate will drop. So in regards to our savings scanner, our 3 alerts are the following:
1) An initial alert letting you know that we identified savings opportunity in the market (ie your product has a lower rate that some player in the market)
2) A follow up alert and report on your bonus rate achievement so you know if you are receiving it or not and why
3) A notification when your introductory rate expires, so you are aware of your new interest rate conditions!
How can we access the Upworth savings account scanner?
These are the 3 steps for you to unlock the power of our scanner:
- Create an account/sign up on Upworth if you didn’t yet (1 minute)
- Go to Add account – Bank Account and connect one or several savings accounts (2 minutes)
- Click on the notification ‘Savings Account Opportunity’ and you will see your situation and how much you are missing out on! (2 minutes)
