The cost of consumer loyalty – Are consumers in the cash saving market being penalised?
We live in a culture where loyalty is considered a noble trait and something to be rewarded. In an environment of heightened high street competition supermarkets have recognised the need to buy loyalty through reward cards. Airlines similarly try to retain custom by offering airmiles. The expectation is that all companies that seek our business act in a similar vein. A report from the Competition and Markets Authority in response to a “super complaint” filed by the Citizens Advice Bureau provides stark evidence to the contrary. It acknowledged that providers of services in key areas – cash savings, mortgages, household insurance, mobile phone contracts and broadband – are treating their customers with something akin to contempt.
Banks, already reeling from FCA action to end the practice of charging excessive fees for unauthorised overdrafts, are set to be subject to further public and media scrutiny. The CMA was highly critical of businesses that exploit their customers and suggested that this malpractice effectively imposes an annual £4 million loyalty penalty. The CMA inquiry uncovered “damaging practices” by firms, including continual year-on-year stealth price rises; costly exit fees; time-consuming and difficult processes to cancel contracts or switch to new providers; and requiring customers to auto-renew or not giving them sufficient warning that their contract would be rolled over. There will be no hiding for banks or building societies that treat their longstanding customers unfairly: the CMA has committed to publicly holding them to account and recommends that regulators publish the size of the loyalty penalty on a yearly basis.
The FCA already has the savings market in their cross-hairs. In January 2015 it published the findings of its cash savings market study , a key conclusion of which was that significant amounts of consumers’ cash – up to one third of all savers – sit in accounts that are over five years old paying paltry levels of interest, with banks and building societies benefiting from widespread inertia among their customers. Further concerns that the market was broken were raised in a discussion paper published in July 2018. A key action this paper has mooted is the introduction of a basic savings rate (BSR).
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Providers can take advantage of high levels of customer inaction to pay lower interest rates to longstanding customers. “While many customers have valid reasons for not shopping around, providers must still treat them fairly, while maintaining competitive rates for those who do.”
The additional impetus provided by the CMA, which expects progress from regulators within six months, means that its imminent implementation seems increasingly likely.
The introduction of a BSR will have significant implications for those offering savings products and their customers alike and has the potential of fundamentally changing the market as we know it today. Principally it will require providers to apply single interest rates to all easy access cash savings accounts and cash ISAs which have been open longer than a set period, potentially 12 months. Individual providers may set their own BSR and offer different rates of interests to their front book of customers – those holding accounts in the period before the BSR applies. However, they will not be able to discriminate between customers based on the age of the account they hold, so that those with accounts over ten years old must be offered the same terms as those holding accounts for just over one year.
This has the potential of removing the incentive to offer ‘locked in’ saving products, equalising saving rates with non-restrictive products or savings accounts with shorter notice periods. Nor will providers be able to vary the terms they offer dependent on how the account is managed, either online, by post or in a branch, or by its size.
The FCA estimates that, as a result, providers may have to pay between £150m and £480m in additional interest annually with the greatest impact being borne by long-established banks with a significant back-book of customers. This will hit their profitability and may act as a disincentive to offer higher levels of interest on the accounts they offer.
While those languishing in low return accounts will benefit from any uplift in rates they receive, others who are more engaged in their finances and switch providers more frequently may not find it as easy to find attractive rates. This, however, may be a boon to challenger banks without the handicap of significant numbers of legacy customers if they choose to tempt business away from mainstream banks by offering higher interest rates.
The FCA hopes that a BSR will “promote competition and help get customers a better rate of interest”. However, this measure aimed at helping savers and emphasising the importance that they regularly evaluate their cash savings is only a starting point, albeit a welcome one. It is important that the ease of switching providers is improved if the introduction of a BSR is to be truly effective.