Patrick Cairns
5 minute read
29 Oct 2015
1:41 pm

Another reason not to trust your bank

Patrick Cairns

Banks are ubiquitous. It’s rather difficult to do without them. And because we can’t ignore them we have learnt to live with them.

We may even sometimes allow ourselves to believe that when they ask ‘how can we help you?’ they really mean it. There are even moments that we feel that they are genuinely in the business of trying to ‘make things happen’ for us.

Yet, they keep acting in ways that reminds us otherwise. No matter how much lipstick they try to smear on their warthog visages, the mask always slips.

I was reminded of this again this week when I wrote what I thought was a fairly innocent piece on fixed deposit rates. I called up the bank call centres, and told them I wanted their fixed deposit rates for certain amounts over certain terms if I only took the interest at maturity.

I didn’t think to question the information I was given. My request, I believed, was specific enough for them to give me a clear response.

In hindsight, perhaps I should have known better. My mistake was to imagine that this was a straightforward question with a straightforward answer. I didn’t reckon with banks being able to manipulate even something this simple.

It didn’t, however, take long for me to have to face up to this. The story was published on Monday morning and within hours the criticism was flowing on social media. The most strongly worded was that my article had so many errors that it was “almost criminal”.

My first thought was that it couldn’t be wrong if I was only reporting the information I had received directly from the banks themselves. I had however made the mistake of not scrutinising what I had been given.

This I learnt when readers pointed out that the rates I had been quoted were not what I had presumed them to be. They pointed out that what I had listed were ‘effective rates’ not ‘nominal rates’, which muddied the waters.

I did note this in the article, but without fully appreciating that an ‘effective rate’ is actually a backward-looking calculation. This was problematic because it wasn’t a like-for-like comparison with the forward-looking rate quoted by Capitec.

To its credit, Capitec does not indulge in the misleading differentiation between nominal and effective rates that all the others do. They quote a single rate, which is actually exactly what anyone would expect an interest rate to be – one that compounds over time with your interest being reinvested.

This, then, is the crux of it: The big four banks and Investec play a game of obfuscation with their clients and potential clients. They quote nominal rates if you intend taking the interest from the deposit during the term, and effective rates if you only want the interest at maturity.

So what’s the difference? Nominal rates are genuine interest rates – the deposit earning interest on that amount that is actually in the account.

Effective rates are simple interest, calculated in retrospect. The bank actually determines the total interest you will earn over the term of the deposit, and then divides that by the number of years you invest for.

As an example, if you deposited R10 000 and the bank calculated that you would earn R2 000 in interest over two years, they would represent that as R1 000 a year and make the effective rate 10%. However, if you were really earning 10% a year, compounded every month, the interest would actually be R2 204 after two years.

The nominal rate for the above example, would be 9.15%. However, even this is not standardised from bank to bank.

For some, the nominal rate is the interest rate compounded at monthly intervals. For others, it is only compounded every year.

Capitec again is on the right side of this. It compounds the amount monthly, meaning that it calculates the interest based on both the original deposit and the interest earned every month.

The result of all of this, is that the average investor has very little chance of understanding the rates the banks are quoting. Without being presumptuous, if I misunderstood what I was told, it’s likely that many others are in the same boat.

It is, unfortunately, another example of how little banks think of their clients. They have seen an opportunity to make their offering appear better than it actually is, and have no hesitation in exploiting it.

What makes it worse is that it took unreasonable effort on my part to get more definitive information out of the banks to clarify the issue. All I wanted was illustrative estimates of the actual amounts an investor would receive on certain fixed deposit amounts over different time periods.

While the majority of them provide this information readily, Capitec and Nedbank initially would not give me this detail from their call centres. They insisted that I go into a branch to get it.

Thankfully I could get the Capitec information from their media relations department, but Nedbank frustrated me for the better part of a day. I eventually did get the information, but not before I had been through three different call centre agents, head office, a local branch and fruitlessly tried to reach anyone in media relations.

Hopefully, when the ‘Twin Peaks’ regulations come into effect, the new market conduct authority will put an end to this blatant misinformation. This is certainly not treating customer’s fairly, and the banks know it. The sooner they are called to order and interest rates are standardised so that clients really know what they are getting, the better.

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