Reserve Bank Governor Anna Breman. Photo / Getty Images
Finance companies have surged in popularity among savers since a new Reserve Bank scheme has started insuring deposits.
Finance companies have collected about 30% more in deposits since the beginning of 2025, according to the Reserve Bank’s latest biannual Financial Stability Report.
This increase is well above that of banks, credit unions and building companies.
The Reserve Bank has put the rise down to the long-awaited establishment of its Depositor Compensation Scheme (DCS) in July.
The scheme automatically insures $100,000 of deposits per depositor, per deposit-taker.
So, if someone had $200,000 of savings at a bank that collapsed, they would get $100,000 back via the scheme.
If they spread their $200,000 evenly across two banks that both collapsed, they would get $200,000 back.
Hence, the industry-funded, government-backed scheme creates an incentive for depositors to divvy up their money across deposit-takers.
Having deposits insured also creates an incentive for depositors to put their money with finance companies that pay higher rates of interest to reflect the fact they are riskier than banks.
This explains the uptick in finance company deposits recently. Chasing higher rates of interest offered by institutions that aren’t as well-capitalised as banks has become a safer bet, so people are doing it.
While the increase was notable, the Reserve Bank noted the sums of money involved were tiny.
By January, finance companies had $700 million of deposits – the equivalent of 0.14% of total deposits across all deposit-takers.
The Reserve Bank noted the layer of protection introduced by the DCS also meant finance companies didn’t need to offer depositors interest rates that were as attractive as those offered before.
Hence, the difference between interest offered on one-year bank term deposits versus finance company deposits has narrowed to around 0.5 percentage points, from 1.4 percentage points in early-2025.
The Reserve Bank noted interest rates offered by credit unions and building societies were less impacted by the establishment of the DCS, as they’ve always been more in line with those of banks.
The Reserve Bank’s director of prudential policy Jess Rowe said savers had moved their money as expected.
She didn’t believe money would keep flowing to finance companies as rapidly as it had with the onset of the scheme, but believed people would naturally keeping diversifying where they held their savings over time.
The Reserve Bank said finance companies were lending the additional money they were receiving to those wanting mortgages.
Because finance companies were able to pay depositors lower rates of interest (relatively speaking) than before the creation of their DCS, they could also charge borrowers less, making them more competitive with banks.
Indeed, the Reserve Bank said finance companies had increased their mortgage lending by about 30% since the scheme’s establishment in July.
It said finance companies tended to focus on niche markets banks were less active in, lending to self-employed people with volatile income flows, for example.
Even though finance companies typically lend to riskier borrowers, and may have loan books that are concentrated in a small number of loans, the Reserve Bank wasn’t worried about the impact the change in the dynamics had on the stability of the financial system.
It noted the sums of money at stake were small.
The total value of residential mortgage lending by finance companies is around $550m, whereas the value of mortgage lending by registered banks is around $388 billion.
The Reserve Bank also noted the vast bulk (around 80%) of new mortgages issued by finance companies were to borrowers with deposits or equity of at least 30%.
It said the share of non-performing finance company loans also remained low.
The bank reiterated its view the Depositor Compensation Scheme made the financial system more stable.
Depositors knowing they will get at least some of their savings back in the event of their deposit-taker failing reduces the likelihood of them pulling their money and creating a run on an institution during times of instability.
Finance companies have to pay proportionately higher levies than big banks to help fund the DCS to reflect the fact they are riskier.
However, they are more heavily regulated now than they were during the Global Financial Crisis, which triggered a flurry of collapses.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.