Term Deposits 101

An interesting article written in the Age on September the 30th September looks at how the CBA has both reduced it’s Term Deposit (TD) rates as well as not passing on the latest RBA rate cuts for it’s borrowing clients. 

Having worked in major banks and looking after TDs I thought it was interesting to see the attached article about the CBA and TDs, so I thought I would offer my insights.  

First thing that comes to mind is that TD customers have a number of traits that are specific to them. On average most TD customers; are 50 years old and over, are conservative in nature (i.e. TDs are simple and covered by a government guarantee), are more likely to set and forget their investment and importantly have commenced their TD via a special rate offer.

However, what people don’t know is that banks sometimes take advantage of these behaviours. So for example, if you saw a great 12 month special say at 3% you’d expect that when this investment were to come due (TDs automatically rollover on the same term) that the next 12 month rate you would roll onto would also be a special rate. Unfortunately for many, who don't check,  the rate has been reduced and the special has been transferred onto another term (e.g. 9 or 11 months). As the financial institution has given the client fair warning (i.e. various statements and T&Cs have been forwarded), they are not liable for the investor’s inaction (i.e. for not checking) and the customer gets locked in for another 12 month period at a reduced rate, with an inability to change quickly.

The other things to keep in mind with TDs are; they are seen as a cash cow to the banks (i.e. they know customers are unlikely to go to a competitor or another product and this is cheap form of finance for the banks), the interest income is taxed, your money is locked away for a minimum of 31 days and there are now a number of good alternatives available to investors.

Anthony Mann - Chief Operating Officer, PE Capital Funds Management Ltd