Savings: Your missing millions

Bank customers with money in term deposits are missing out on hundreds and sometimes thousands of dollars of interest.

The Consumers' Institute yesterday said it was outraged at a banking practice that affects a portion of the $69 billion in term deposits.

Simply, if customers don't specify they want frequent crediting of interest, the banks use their default policies, which can deprive people of considerable sums of cash.

Unless asked otherwise, some banks pay out all the interest at the end of the term rather than compounding it at regular intervals, which makes the money grow faster.

On a typical five-year, $10,000 term deposit, a customer can miss out on $240, more if they are in a lower tax bracket.

On a $100,000 deposit, they can miss out on $2400 or more.

Some customers have told the Weekend Herald they do not recall being offered a choice of how their interest was to be calculated.

After inquiries, the BNZ said it would notify customers who could have been adversely affected by its default position shortly.

David Chaston of JDJL Ltd, which surveyed banks on their behaviour, said most front-line staff were trained to offer the interest crediting and payment options to customers and explain their impact.

But David Russell from the Consumers' Institute and several term deposit holders the Weekend Herald spoke to said they did not remember being told about the options.

"It should be very, very clearly explained to the customer, at the time they lend the bank their money, what the deal is going to be," said Mr Russell.

"If you look at the other side of the coin, when the bank lends you money and calculates the interest you pay them, they don't charge on an annual basis but much more frequently."

Mr Chaston said almost all banks offered compounding arrangements for terms of six months or more, or nine months in some cases, if customers asked them.

Most building societies did not compound interest but most finance companies did, he said.

Many term deposit holders are not affected, or only slightly affected, as most deposits run for less than a year, and the BNZ says 90 per cent of its holders take their interest out rather than leaving it to compound.

But for others, "given many New Zealanders' quite poor level of financial education", the impact was likely to be significant, Mr Chaston said.

The banks' default policies on term deposits of one year-plus are:

ANZ: Pays interest annually. You can't leave the interest in the term deposit. It is transferred to a bank account where it may earn interest.

ASB: Pays interest annually. If you leave it in the bank, you will earn interest on that interest.

BNZ: Pays all interest at the end of the term, without compounding.

National Bank: Pays interest twice a year. If you leave it in the bank, it will compound.

Westpac: Pays interest quarterly. If you leave it in the bank, it will compound.