Question
I have just received the annual letter informing me that my cash ISA interest rate will be reduced to 0.5%. I will now check out other banks, building societies prior to switching my cash ISA. My question is simple, why do they do this? Is it in the hope that they will be left with a small number of customers who do not keep tabs on their interest rates. Surely it might just pay them to build up a loyal customer base by paying a decent ongoing rate. There again maybe I am missing something?Answer
Yes, it's a very annoying practice that banks and building societies persists in doing, most likely because it's very profitable.
The usual ploy is they offer a very competitive (potentially unprofitable) rate to attract lots of new customers. A year or two down the line, the rate will more often than not have become very uncompetitive, either due to introductory bonuses expiring or the rate simply being cut. Of course, some savers will do the sensible thing and more elsewhere, but many don't meaning the bank/building society makes a very healthy profit thereafter.
I suppose the issue is the most competitive rates offered these days are either unprofitable or not profitable enough for the banks/building societies concerned, they're just a carrot to tempt in new customers. If one bank decided to offer a rate it could afford to maintain long term, chances are it wouldn't look especially competitive, so would likely fail to attract scores of new customers. I can only see this working well if all banks and building societies followed suit, which sadly I doubt will ever happen.
On the bright side, if you're pro-active and play the game by transferring accounts when rates come off the boil, you'll likely benefit from this practice - at the expense of those less active savers who stay put.
One alternative for those who don't want the hassle of monitoring or switching accounts is the Investec High 5 Issue 2 account, which pays the average of the top 5 savings accounts (as per Moneyfacts best buy tables), although the account has a potentially restrictive 6 month notice period.
I have just received the annual letter informing me that my cash ISA interest rate will be reduced to 0.5%. I will now check out other banks, building societies prior to switching my cash ISA. My question is simple, why do they do this? Is it in the hope that they will be left with a small number of customers who do not keep tabs on their interest rates. Surely it might just pay them to build up a loyal customer base by paying a decent ongoing rate. There again maybe I am missing something?Answer
Yes, it's a very annoying practice that banks and building societies persists in doing, most likely because it's very profitable.
The usual ploy is they offer a very competitive (potentially unprofitable) rate to attract lots of new customers. A year or two down the line, the rate will more often than not have become very uncompetitive, either due to introductory bonuses expiring or the rate simply being cut. Of course, some savers will do the sensible thing and more elsewhere, but many don't meaning the bank/building society makes a very healthy profit thereafter.
I suppose the issue is the most competitive rates offered these days are either unprofitable or not profitable enough for the banks/building societies concerned, they're just a carrot to tempt in new customers. If one bank decided to offer a rate it could afford to maintain long term, chances are it wouldn't look especially competitive, so would likely fail to attract scores of new customers. I can only see this working well if all banks and building societies followed suit, which sadly I doubt will ever happen.
On the bright side, if you're pro-active and play the game by transferring accounts when rates come off the boil, you'll likely benefit from this practice - at the expense of those less active savers who stay put.
One alternative for those who don't want the hassle of monitoring or switching accounts is the Investec High 5 Issue 2 account, which pays the average of the top 5 savings accounts (as per Moneyfacts best buy tables), although the account has a potentially restrictive 6 month notice period.
Read this Q and A at http://www.candidmoney.com/askjustin/818/why-do-best-buy-savings-accounts-become-uncompetitive
Interesting post. I have been wondering about this issue, so thanks for posting. Pretty cool post. It’s really very nice and Useful post. Thanks
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