Banking on biases

Today, UK consumer group Which? highlighted how much money consumers are losing out on due to a practice that has infuriated me for some time – although admittedly the fury has given way to resignation and procrastination. Hey, I’m only an irrational human being after all.

Not much interest on these savings

You look for a savings account. You find the best one on the market, say, the Easy Saver, Easy account. You sign up, you deposit some money in it. All is well. Except that a few months later you realise that 3% interest rate is now umm 0.1% if you’re lucky. For some reason, the bank has a new savings account called the Savings, Easy Savings account. The Savings, Easy Savings account offers the same high rate of interest that Easy Saver, Easy used to offer, before it was gradually and sneakily reduced – and is exactly the same in every other respect.

It would be like signing up for 8 Mbit/s broadband only to find out a year later that your broadband provider has whittled the speed you’re getting down to 1 Mbit/s, whilst protesting that you could always switch to their new 8 Mbit/s product if you’re not happy with what you’re currently getting. Well of course you’re not happy. You signed up for 8 Mbit/s.

A broadband company couldn’t get away with this. But banks can because consumers aren’t very good at continuously keeping track of what interest rate they’re getting compared to the best savings account on the market. Even when they do realise they’re not getting a great deal, procrastination means that they might not necessarily switch. Consumers who really care about the interest rate they get on their savings accounts can switch to the bank’s “new” savings account.

In fact, this strategy is a good way for banks to only offer the best rates to the customers who are most likely to switch away. This means that they don’t need to offer good rates to all their customers – and so it’s likely to be profitable strategy (economists would call this price discrimination).

A new bank, say, New Fair Bank might consider whether it’s profitable to advertise itself as offering customers accounts that are guaranteed to always be the best ones on offer. But this requires spending money on educating consumers on what all the other banks are up to, with potentially little reward – once consumers are wise to what’s going on, it’s not necessarily the case that they will switch to New Fair Bank. Firstly, newly educated customers might be better off sticking with Old Annoying Bank, provided they put their new knowledge to good use and remember to always switch to Old Annoying Bank’s new savings accounts. Secondly, other banks benefit from New Fair Bank’s investment in education without bearing any of the costs – Even Newer Fair Bank can come in and offer the same deal as New Fair Bank whilst having to spend a lot less on  explaining to consumers what Old Annoying Bank is doing.

And this is where the usefulness of Which? comes in: they provide an educational service that would not be provided in the market otherwise.

I’m now off to compare savings rates.

Once I’ve checked my Twitter account.

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