Low interest offered by banks | Are savers getting cheated?

The low interest offered by the big banks to savers for their money is disturbing given the rapid rise in rates over the past year, and voices are being raised to denounce the situation.

The big Canadian banks are currently abusing their powers, says associate professor in the finance department at HEC Montreal Amir Barnea.

“I understand the rate offered was low when interest rates were at their lowest, but now that they’ve gone up, it’s not clear why they aren’t offering more in savings accounts,” says- he.

Seven consecutive rate hikes in 2022 by the Bank of Canada have brought the key rate to 4.25%. The major Canadian banks have followed suit and their prime rate now stands at 6.45%. It was at 2.45% at the start of last year.

If you have a mortgage line account with a major bank, the rate applied is very likely close to the 7% mark after following the rate increases for a year.

“Now that rates have gone up a lot, it’s really cheap from banks to pay only 1.4% to 1.8% in savings accounts,” says Amir Barnea. “In some other types of accounts (RRSP, TFSA, etc.), it can even be zero,” he adds.

In investment accounts, chief investment officer and portfolio manager Alain Chung of Montreal firm Claret points out that effectively zero is being offered.

“I think it’s to force us to execute transactions and generate commissions or management fees,” believes this investment professional.

In the context where the inflation rate still stands at 6%, this situation is not acceptable, says Professor Barnea.

He believes that a reasonable and acceptable rate in savings accounts would be 3-4%.

At the Royal Bank – the largest banking institution in the country – the high interest savings account offers a rate of 1.4%.

By way of comparison, at Desjardins – which is not a bank, but nevertheless a large financial institution in Quebec – the rates offered in savings accounts vary from 0.05% to 1.60%, depending on the product. held.

They are rather fixed in time, but promotions are occasionally offered on new deposits. Currently, holders of a TFSA or RRSP savings account can benefit from a promotional rate of 4.25% for a limited period.

At the Royal, a rate of 4.5% is also currently offered, but only for a period of three months when opening new accounts.

Amir Barnea concedes that there are promotions, but they are always short term. “For two months or three months, you can receive 4%. But after a few months, it’s over. There are always offers on the banks’ websites. Guaranteed investment certificates of course offer a higher rate, but the rate should still be higher for money in savings accounts,” he said.

“No competition”

The problem is that “there is no competition,” insists Mr. Barnea. The rates offered by the major banks always move together. It is clear that there is something bizarre in this market. We have to investigate this. It’s really a weak market. »

Desjardins spokesperson Valérie Lamarre indicates that savings accounts are mainly intended to put money aside for a short-term project or to accumulate and then pay an amount into an RRSP, for example.

“So, if you want to compare products with the same term, the difference between the rates is less important,” she points out. For example, for a term savings and a fixed-rate mortgage for the same term, on January 16, the rate is 4% for 5-year term savings, while the rate is 5.69% for a 5-year fixed rate mortgage. »

At the National Bank, a spokeswoman points out that the interest rate structure of savings accounts is influenced by a set of criteria including the costs associated with infrastructure and product management or the recurrence of funds, i.e. the movement (inflows and outflows) envisaged of the sums deposited.

At BMO, it is pointed out that “many factors” are taken into account in determining the pricing of savings products such as interest rates for different time horizons, different types of risk, growth aspirations, differentiation products, etc

Management adds that savings accounts and home equity margin accounts, for example, are “completely different” products. “One is primarily for savings while the other is a lending product. In this context, these two products are subject to very different considerations when setting rates. »

Royal Bank indicates that when considering changes to its prime rate and interest rates on deposits and home equity loans, it considers several factors, including the competitive environment, exposure to risk, its liability to customers and shareholders, as well as cost of funds and regulatory compliance costs.

“It takes a strong Competition Bureau,” he continues. There is no real will to try to change the situation. Same thing with politicians. »

Better in the USA

The professor notes that the major Canadian banks with a presence in the United States offer rates for equivalent accounts that are sometimes three or four times higher than in Canada. “It’s only because of the competition. This is proof of the lack of competition in the Canadian market. There is more competition in the United States. Canadian banks are trying to attract customers to the US market and one way to do that is by offering higher interest,” he says.

Amir Barnea points out in passing that the Competition Bureau of Canada must carefully analyze the proposed acquisition of HSBC Canada by the Royal Bank. “Is it reasonable for a major Canadian bank to buy another bank in the country? I don’t find that reasonable,” he said.

The professor also says he sees a similar situation for credit card rates in the United States and Canada. “There is a big gap. Canadian banks present in the American market offer a lower interest rate in the United States than in Canada. Why ? Because of the competition,” he says.