What are ADIs and how could they protect your savings?

With the RBA slashing Australia's cash rate, and big banks cutting savings rates, it's getting harder and harder to find savings accounts paying interest at a rate higher than inflation. In times like these, many Aussies are searching for alternative options to the big banks to help grow their wealth. 

Some neobanks and other smaller banks are offering higher than average savings rates, however not all Australians are confident about depositing their money with these institutions. After all, in uncertain economic times, how could you be sure that your savings would be safe with a bank that doesn’t have decades of experience to call on?

Fortunately, there is a way to check if your money in a bank is guaranteed against the risk of financial collapse – check if the bank is an ADI. 

What is an ADI?

In Australia, banks, building societies, credit unions and other financial institutions are sometimes referred to as Authorised Deposit-taking Institutions, or ADIs.

This refers to financial institutions that are licensed to accept and hold deposits of money from the general public, including savings accounts, term deposits, and home loan offset accounts.  

Who decides which banks can be ADIs?

ADIs are licensed and authorised by the Australian Prudential Regulation Authority (APRA), which supervises Australia’s financial industry.

Why should I deposit money with an ADI?

Firstly, Australian banks (and international banks that want to operate in Australia) need to register as an ADI with APRA to legally accept deposits in Australia.

Secondly, money that you deposit with a licensed ADI is guaranteed by the Australian government under the Financial Claims Scheme (FCS). This means that if the bank was to go out of business, the government would be able to make sure you get your money back.

How much money does the Financial Claims Scheme cover?

The government’s FCS guarantee covers up to $250,000 per person. If you deposited more than $250,000 with an ADI, and that ADI collapsed, you’d only be able to claim back a maximum of $250,000 from the government. This includes if your money is spread across multiple accounts with the ADI.

Also, keep in mind that some ADIs operate under multiple trading names. If you have money deposited with multiple banks that all operate as part of the same ADI, only $250,000 in total will be guaranteed.  

Even if part of the money you’ve deposited with an ADI isn’t guaranteed by the FCS, you may not necessarily lose it if the ADI was to go out of business. This would depend on how the liquidation process is managed. Learn more about FCS payments.

Does a financial institution need to be an ADI?

A business doesn’t have to be an ADI to offer certain financial services, such as lending money.

For example, some online-only mortgage lenders specialise in providing home loans with low interest rates, and some car dealerships offer car loans from vehicle finance specialists.  

But if you want to deposit money into a term deposit or savings account, you’ll need to choose an ADI, as non-ADIs can’t legally accept deposits in Australia.

Restricted ADIs (RADIs)

If a company is first starting out in the finance industry (for example, a newly-established neobank), they may be able to apply to become a Restricted ADI for a two-year period. During this time, they can accept deposits of up to $250,000 per account holder, and hold a maximum total balance of $2 million across all accounts.

Once the two-year RADI period is up, the institution will need to apply for a full ADI license, or exit the industry.

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Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.