The bank’s new deposit account for SMEs could hurt margins but force the other big four to follow.
The lending giant, which already banks more than one in five Australian businesses, said the new account would pay 2.10 per cent interest to businesses, offering almost immediate access to funds with withdrawal notice periods as short as 48 hours, which would help them better manage their cash flow needs.
“This short notice product is the first of its kind in Australia, giving customers more immediate access to their funds,” CBA executive general manager of everyday business banking James Fowle said.
“We believe that the opportunity is significant for us to gain market share, and to win deposits from our competitors.”
In the past three years, CBA has invested over $600m to build its business banking franchise, where National Australia Bank has been the traditional leader, and has steadily gained market share in the space capturing 22.4 per cent of the business deposit market as of the end of last year.
This latest move aims to attract even more customers from rivals, adding more pressure to the already intense competition banks have been facing for deposits in recent months. But it also runs the risk that its margins would be hurt immediately by having to pay higher rates as customers move.
“This could prove to be an attractive product given that small businesses tend to be transaction-heavy,” said Evans and Partners bank research director Azib Khan. “I think it will initially put CBA‘s margin at risk as small businesses shift deposits from transaction accounts to the new product.
“However, over time, CBA will hope to gain small business transaction banking market share.”
CBA executive general manager of everyday business banking James Fowle.
Mr Fowle said rivals might be forced to follow CBA’s move if it proved a success.
“If a competitor launched a new product … I would wait to gauge its success, and if it was successful and I saw it having an impact on my customers‘ behaviour, then I would need to respond,” he said.
Australian businesses normally manage their cash flow through either non-interest bearing transaction accounts or term deposits that offer higher rates but entail funds being tied up for longer, while notice accounts are usually for wholesale banking customers only and involve notice periods of at least 35 days, so that banks can meet liquidity requirements.
CBA’s new short notice deposits also offer 2.85 per cent on accounts with a minimum withdrawal period of seven days. The rates on offer are between 0.75 per cent and 1.5 per cent higher than those on savings accounts.
With the RBA’s term fund facility expiring this year and rising interest rates, competition for deposits is intensifying as customers opt for longer-term deposits to benefit from higher interest rates compared to transaction and savings accounts.
In the reporting season that ended earlier this month, bank executives said the fight for deposits had escalated, with exceptional competition for term deposits and a noticeable pick-up in competition for savings accounts.
Mr Fowle said CBA’s new offering addresses a need that was “not being met” now that the rapid rise in cash rates has left businesses managing a trade-off between putting funds into longer term deposits to get higher returns or having instant access to their funds.
He expected some money sitting in online savings would move to get the higher rates available, while small and some medium-sized businesses in term-deposits looking for flexibility would also be attracted to the short notice account.
“Our projections of the first couple of years that we would see a reasonable proportion of both transact balances and term deposits moving,” he said. He said that would see a balance between margin pressures and liquidity benefits.
“It’s a grade off between those two that I expect would balance out. Businesses will always need to keep a portion of their cash flow in their transact accounts, because they have transactions flowing in and out on a daily basis.”
“They can lock some up in longer term savings, and we expect them to do that. I don’t expect a radical shift overnight. I think we will see a shift happening over years, given the size of the deposits market and how long it takes to change customer behaviour as customers become familiar with the product.”
In European and South African markets, where these type of accounts exist, customers use the three categories – at call, on notice and term deposits – “pretty evenly, depending on the interest rates environment at the time”, he said.
The deposit offer was posted on CBA’s website on the weekend and the bank has already had inquiries from small business customers.
“This is a pretty good offer,” said Canstar group executive Steve Mickenbecker. “Businesses wanting to access funds at short notice are still going to be able to earn 2.85 per cent, and that’s a lot better than what they are earning on business transaction accounts. But it will no doubt come at a cost to CBA’s interest margins.”
CBA head of business bank Mike Vacy-Lyle said the bank was continuing to see “good growth for credit”, after a 12 per cent increase in business lending in the March quarter. Appetite was particularly strong for asset financing in the small business segment, while lending demand from corporates was also strong.
But with higher rates and stubborn inflation, managing cash flow was key in the current environment, and therefore customers doing it tough or facing hardship would see notice periods for withdrawals waived in the new accounts.