How do banks profit from paying switching fees?

RG2015

NatWest are the latest bank to offer a switching fee, in this case £125.

Most of the switchers posting on this site are switching a donor account rather than a well used account. Hence they are not really switching their bank in they way the banks intended. Once they have their fee they abandon the account or leave it to become the next donor account.

I suspect that a very large proportion of the non-MSE members will also do this and yet the banks continue to use this policy.

Is there any evidence that the banks make any money from this and does anyone know how much this is likely to be?

EssexExile

RG2015 wrote: »

...yet the banks continue to use this policy.

Is there any evidence that the banks make any money from this

See above. They wouldn't do it if it didn't pay.

Katiehound

Massaging figures?
Maybe it looks good to say how many new customers they gained this way for investors? but of course the figure of how many departed will not be revealed!!

binaryuniverse

They certainly don't make any money from the customer this way. They're loss leaders, pure and simple. In the same way Nationwide's 5% on £2500 for a year will pay out about £125 is a loss leader.

As mentioned above, it's a case of
a) massaging the figures or
b) hoping to retain your business and make the money back off you eventually. Naturally this doesn't work in the case of the switcher with a donor account, in it for the bonus, then off.

I wonder how long it'll be before banks make the requirements a lot less simple than they are at present. HSBC seem to have a decent idea of giving you a further £50 if you're still there in a years time. Staggered cashback may be one way to do it , along with a certain amount of transactions, akin to to TSBs offer to new customers.

PeacefulWaters

90% plus of switchers will switch once only. Initially moving their current account and eventually seeing their new bank as first choice for other financial products.

Typical view to making a profit at customer level on a product or service is 4-5 years.

takman

RG2015 wrote: »

NatWest are the latest bank to offer a switching fee, in this case £125.

Most of the switchers posting on this site are switching a donor account rather than a well used account. Hence they are not really switching their bank in they way the banks intended. Once they have their fee they abandon the account or leave it to become the next donor account.

I suspect that a very large proportion of the non-MSE members will also do this and yet the banks continue to use this policy.

Is there any evidence that the banks make any money from this and does anyone know how much this is likely to be?

I disagree, from my experience i know a lot of people who consider opening a donor account and switching it to another account with the required direct debits "too much hassle" even if they get £125 for it.

Plus alot of people still look to their bank as the first point of call when looking to take out new financial products such as credit card, loans and mortgages which is where the banks make the money back.

If the figures didn't show that on average they will make a profit after offering the incentive then they wouldn't be doing it.

RG2015

PeacefulWaters wrote: »

90% plus of switchers will switch once only. Initially moving their current account and eventually seeing their new bank as first choice for other financial products.

Typical view to making a profit at customer level on a product or service is 4-5 years.

Thank you for your reply. This is very interesting.

Just out of curiosity, where can I see the 90% and 4-5 year statistics that you have quoted

PeacefulWaters

RG2015 wrote: »

Thank you for your reply. This is very interesting.

Just out of curiosity, where can I see the 90% and 4-5 year statistics that you have quoted

Work for my previous employer!

RG2015

binaryuniverse wrote: »

They certainly don't make any money from the customer this way. They're loss leaders, pure and simple. In the same way Nationwide's 5% on £2500 for a year will pay out about £125 is a loss leader..

But these are not the same. A switching fee of £125 is a straight loss to the bank.

Nationwide will however, earn money on the £2,500 that thousands of customers hold in the account for the first year.

Zanderman

RG2015 wrote: »

But these are not the same. A switching fee of £125 is a straight loss to the bank.

Nationwide will however, earn money on the £2,500 that thousands of customers hold in the account for the first year.

But Nationwide will 'earn' less than the £125 per £2500 that they give away. So it's still a loss leader. If banks could turn a profit AND offer 5% interest they'd all be doing it all the time, not just on £2.5k for a strict limit of 12 months

AirlieBird

binaryuniverse wrote: »

HSBC seem to have a decent idea of giving you a further £50 if you're still there in a years time.

On the other hand while one part of HSBC plc pay you to stay, another part of HSBC plc pay £100 to leave after 6 months, which is just bizarre.