On Monday, the Payments Council's free switching guarantee will come into effect. This is designed to increase competition in banking by making it easier and quicker to change banks and thereby helping people to vote with their feet. If anything goes wrong, your new bank will refund any interest paid or lost on either your old or new account. Sounds good so far, doesn't it?
But half of people have never switched bank account, despite the fact that some could make significant savings a year in bank charges and credit interest by switching. For the new service to be truly successful it will need to significantly transform switching rates from last year's tiny 3%.
Which? will be monitoring the new switching process and has developed seven tests to assess how it is working for customers:
Seven days - does the switching process work?
Willing - are more people switching?
Innovation - has it led to new products and service?
Trust - do people have more confidence in the switching process?
Competition - is this shaking up the market?
Hassle-free - what happens when things go wrong?
? - did people get a better deal and are they happy with their provider?
We will be monitoring the success of the new seven working day switching against our seven tests. On its own the seven day switching service won't necessarily transform competition in banking so we also need ministers to keep driving forward wider reforms to improve culture, standards and competition.
It's no surprise people don't switch at the moment when trust in banks to act in the best interest of consumers is currently bumping along at just 37%. The cost of the PPI mis-selling scandal, now more than double the cost of the Olympics, and the catastrophic IT failures over the past year, have all contributed to endemic distrust. People understandably don't believe that one bank is better than another. But once switching is easier, it will be up to the banks to convince them otherwise.
In an attempt to do this, we've already see banks wooing potential new customers over the last few weeks with tempting money offers and cash back debit cards. While appealing, consumers should be wary not to let these offers become the sole basis of their decision to switch. Switching to the wrong account could cost you far more in the long run than any of these offers.
The problem is if the banks just throw money at people, rather than use better customer service or better value products to attract new customers, then consumers might be sucked into ignoring the more important considerations when moving to a new bank, such as whether the account will suit their financial situation and how much it will cost them to manage their money.
A cash incentive isn't a problem if you have already decided to switch based on customer satisfaction scores or if you have checked the overdraft charges, or the in-credit interest rate. However, this is far from easy to do. When we gave a group of bank customers a mock statement to calculate the cost using an unauthorised overdraft, not a single person managed to get the calculations right - despite one volunteer studying for a PhD in maths.
Instead of clouding people's judgement with one-off rewards, banks need to make it simple to compare the cost of running a current account so people can pick the one that's right for them. They need to give customers a reason to switch to them, not just a golden handshake.
The biggest reason people leave their banks is bad customer service. Rather than throwing cash incentives at the problem, banks should show customers that they've learnt from their mistakes by offering better service and more competitive products.
Clearly the biggest banks have a lot of work to do. In our most recent bank customer satisfaction survey, the high street giants Barclays, Halifax/Bank of Scotland, HSBC, Lloyds, NatWest/RBS and Santander all scored below average.
No one should stay with an unsatisfactory provider simply because switching is too much hassle or because they think it won't make a difference. It can and it should.
In the meantime, as the banks embark on an advertising blitz to entice new customers, they need think seriously about how they can keep their current account holders happy and what tangible benefits they can provide to new customers, beyond a one-off bait.
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