Smoke, mirrors and higher returns

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Smoke, mirrors and higher returns

A 24-year-old office worker surnamed Han broke into her savings account in December after spending the last 10 months squirreling away 500,000 won ($470) a month.

“I opened the account early last year as the bank told me I could get a maximum return of 7 percent interest,” Han said. According to her understanding, she would be eligible for the higher interest rate as long as she spent at least 10 million won on her credit card issued by the same bank over the course of the year. She considered this realistic.

However, she later learned she had misunderstood the terms of the deal.

“I didn’t know I had to spend an additional 10 million won on top of what I’d spent the year before,” Han said. “I decided to close the account because my spending would grow exponentially compared to the interest I would gain.”

Financial companies are offering numerous products these days that offer a slightly higher interest rates, especially as the central bank’s loose monetary policy has been keeping interest rates on deposit accounts and other similar financial products relatively low.

However, when customers look at the fine print they are often disappointed as they realize the rates are either impossible to achieve or not worth the bother due to the spending outlays they require.

According to the Bank of Korea in October, the average interest rate on deposits was 3.08 percent last year. This was 0.7 percentage point lower than the rate at the end of 2011 (3.77 percent). As it is difficult for the central bank to tighten its monetary policy, banks’ interest rates on deposits or even loans are likely to remain at the current level.

To lure clients, banks are offering a slightly higher rate of roughly 4 percent or above along with certain conditions. So far the ploy has worked, with customers flocking to get whatever they can get their hands on.

Some 38,0000 deposit accounts have been opened at Woori Bank since it launched a product in July offering a basic annual interest rate of 4 percent. Subscribers can gain an additional 2 or 3 percentage points depending on how much they spend on their credit cards. The more they spend, the higher the rate. However, to get a rate of 7 percent - the maximum limit - they have to spend 7 million won in the first year, 17 million won in the second year and 27 million won in the third.

Over the last two years, KB Kookmin Bank has attracted over 290,000 people to a three-year maturity account that offers a compound interest rate at the starting rate of 4.1 percent. This effectively offers the same returns as a savings account with an interest rate of 4.26 percent.

However, to subscribe for the account, the customer has to be between the age of 18 and 38. Additionally, they can only deposit up to 300,000 won a month. Supposing they hit the maximum ceiling each month, their total interest after three years would amount to 600,000 won. This is only about 22,500 won more than similar accounts at other commercial banks, which don’t set such limits.

These products may sound good at first glance but they merely “offer a similar yield to subscribing to a one-year maturity account several times,” said Cho Nam-hee, head of the Financial Consumer Agency. “The compound interest is not as high as customers expect.”

Banks say a main reason for the growth in the number of financial products being used to attract customers with higher interest rates but hard-to-meet conditions boils down to the government’s loose monetary policy. This, they say, has made it difficult for commercial banks to develop distinctive and alluring products.

A banker, who requested anonymity, said that even though customers are aware such products cannot be as good as they initially appear, they subscribe anyway due to a lack of alternatives.

By Kim Hye-mi, Wi Moon-hee []
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