Figuring out what you really earn on bank savings isn’t simple

MR BLOGGS, a pensioner who is battling to make ends meet each month on his savings, is drawn to a big red Absa advertisement in the newspaper: 13% interest on a fiveyear fixed deposit.

“That’s fantastic,” thinks Bloggs. “That’s double what I’m getting in my unit trust fund. I’ll withdraw my money and put it in the fixed deposit.”

He phones Absa’s call centre. Bloggs: “I’d like to find out about your 13% fixed deposit over five years. Sounds too good to be true. What would I earn annually on a deposit of R1 million?”

Call centre operator: “R85 000.” Bloggs: “But that’s not 13%. If it was 13%, I’d get R130 000 a year.”

CCO: “If your interest is paid out annually, the interest rate is 8.5%. If the interest is paid on expiry, the rate is 10.5%. You’d get out R1 650 000 after the five years.”

Bloggs: “So where does the 13% come in?”

CCO: “That’s the simple rate per year on your initial capital over five years.”

Bloggs: “What the #$%@!”

The scenario is fictitious, but the figures are real. (Note that Bloggs is relatively money-savvy.)

BEFUDDLED

Absa is the latest bank to befuddle us with interest rates. Two years ago Nedbank did it (see “Does Nedbank think we’re simple with its 13-percent rate?” on our website: www.persfin. co.za) and, although not as in-yourface, other banks are also guilty.

For example, African Bank, which currently offers the best rates on a five-year fixed deposit, makes no distinction between compound, simple, nominal or effective rates in its online rates table, offering 13.33% (simple) on a five-year deposit that has an annual rate of 10.75% (compound).

Confused? Either the banks are not making the distinction intentionally in the hope that we won’t notice, or they are just as confused as we are. There is no reference to simple interest in the Absa ads, just the ubiquitous “*Terms and conditions apply”, in extremely small lettering.

STANDARD MEASURE

To compare apples with apples, you need a standard way of showing return on investment. The universally accepted measure is the compound annual growth rate (CAGR), and this applies to any investment, be it a unit trust fund or a bank deposit. This is how much the investment grows per year, expressed as a percentage. If the returns are reinvested, they compound over time.

There is a small difference between nominal CAGR and effective CAGR, and this is because interest is often calculated monthly or even daily, so the end result after compounding is slightly higher than the advertised, or nominal, rate.

The 13% rate in the Absa advertisement is not the CAGR, either nominal or effective. It’s a simple rate calculated backwards from what the CAGR of 10.5% would give you over five years. The difference between 13% and 10.5% on a R1m investment equates to almost R200 000. Is that misleading or what?

REGULATIONS AND CODES

Among the regulations that financial institutions are subject to are rules prohibiting misleading advertising.

All banks are members of the Banking Association of South Africa (Basa) and are subject to its Code of Banking Practice, which states: “We will ensure that all advertising and promotional material is clear, fair, reasonable and not misleading.”

With the recent implementation of the so-called “Twin Peaks” legislation, banks fall under the Financial Sector Conduct Authority (FSCA) regarding market conduct.

They are subject to the FSCA’s Treating Customers Fairly (TCF) principles. One of TCF’s six expected outcomes is that “customers are provided with clear information and kept appropriately informed before, during and after point of sale”.

There is also the industry’s Ombudsman for Banking Services, to whom you can complain if you feel you have been treated unfairly.

RESPONSES

When asked if Absa was transgressing its code, Basa issued the following terse statement: “As an industry association we do not comment on the products and services of individual members. Please refer the question directly to the bank concerned.”

The Ombudsman for Banking Services responded: “The office has not received any complaints from bank customers about the impact of misrepresentation of marketing products/services by the banks. Banks have a duty to be fair, transparent and ethical in their dealings with their customers. These principles are the cornerstones of the TCF outcomes. If a bank is guilty of misleading advertising and, as a result of that misrepresentation, a bank customer makes an uninformed financial decision, then the bank in question will have a legal duty to place the customer in the position he would have been in if such misrepresentation had not been made.”

The FSCA had not responded by the time of going to print.

The final word goes to Absa. Cowyk Fox, managing executive, unsecured banking at Absa, told Personal Finance that Absa was serious about enabling a savings culture in South Africa, and it believed that fixed deposits could play a valuable role in its customers’ balanced investment strategy.

He said customers received a full breakdown of rates on application.

“In order to ensure transparency when potential customers apply via our branches, they are presented with a full quotation that outlines the nominal as well as the effective rate. This is discussed and explained before they enter into any agreement with the bank. We also display both interest rates on our digital channels for more information to augment our advertisements.”

He said most banks quoted their effective rate as a simple rate. “The choice of communicating the effective rate was informed by our desire to maintain the consistency in respect of the language we generally use with our fixed-deposit customers. They are normally quoted on an effective rate when they choose to keep their investment until the end of term to reap maximum returns.

“While there are at least two variations of interest calculations, importantly, the customer ultimately receives the same investment benefit of R65 036 from R100 001 invested over a period of five years, with interest paid at maturity. Both interest calculations are consistent with how we have generally communicated with our customers.”

Personal Finance asked Absa why it was transparent when customers applied, but not in its advertising.

“Both rates (nominal and effective) are disclosed on our website, and our customer-facing colleagues have been enabled to effectively engage with our customers. By their nature, advertisements are shorter and therefore not adequate for elaborate details about products. Referencing the terms and conditions is not a trap but an indication that the customer requires further details prior to making a final decision. It is at this point [that] our customer-facing colleagues come in to provide further details,” Fox said.

He also said the bank had not received the type of feedback described in my opening scenario.

“To assess feedback, we rely on multiple sources from customers through which they channel their (dis)satisfaction about product experience. This feedback is utilised to gauge our customer impact emanating from our products/solutions as well as to gain much-needed customer insight for future commercial efforts.

“None of the feedback received, via these platforms, suggested any customer concerns. Instead the inverse is true.”