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How do banks profit from paying switching fees?

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  • RG2015
    RG2015 Posts: 6,048 Forumite
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    Massaging the figures is interesting. PR and sentiment are nebulous but the city often runs on these difficult to quantify concepts. So I certainly buy in to this argument.

    Hoping that customers stay loyal after pocketing the windfall is a fascinating policy but perhaps this is what happens.

    I know that banks continue to offer these enticements but is this proof of their profitability?

    RBS continued to make dubious acquisitions causing the loss of £billions thereby disproving any link between continuing policies and profitability.
  • RG2015
    RG2015 Posts: 6,048 Forumite
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    EssexExile wrote: »
    See above. They wouldn't do it if it didn't pay.
    Fred Goodwin's world domination policy?
  • Wilt
    Wilt Posts: 100 Forumite
    Part of the Furniture 10 Posts Name Dropper
    edited 30 January 2018 at 6:52PM
    Possibly just a ruse to make the regulator think the market is truly competitive so they don't look in to putting extra measures in place to make switching more likely.

    I do think the switching incentives probably make sense if it is part of a long term advertising strategy like First Direct have done - eventually you run out of the MSEers who are just going to switch a dummy account and get to where you want to be - possibly catching the eye of a potential customer who has just spent an hour on hold to their existing bank and are a bit annoyed.

    The time limited offers don't really make sense to me though (like B/Yorkshire Bank) - you'll just get inundated with people switching dummy accounts & have very little time to attract real customers.
  • RG2015
    RG2015 Posts: 6,048 Forumite
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    edited 30 January 2018 at 7:01PM
    Zanderman wrote: »
    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
    Clearly they are both loss leaders but all I said was that they were not the same.

    One is a straight loss of £125 and the other is a possible loss of £40 assuming that Nationwide lends out the £2,500 at their current preferential loan rate of 3.4% p.a. for one year. I am sure that Nationwide also lends at more than 3.4% plus fees for longer than one year.

    Yes it is a simplistic argument and there will be many other factors but the basic arithmetic is sound.
  • takman
    takman Posts: 3,876 Forumite
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    RG2015 wrote: »
    Clearly they both loss leaders but all I said was that they were not the same.

    One is a straight loss of £125 and the other is a possible loss of £40 assuming that Nationwide lends out the £2,500 at their current preferential loan rate of 3.4% p.a. for one year. I am sure that Nationwide also lends at more than 3.4% plus fees for longer than one year.

    Yes it is a simplistic argument and there will be many other factors but the basic arithmetic is sound.

    You can't really think of it that way because they don't need your £2500 in the bank to be able to provide a loan to someone. So they could stop offering the 5% interest but still be able to approve the same amount of loans.
  • RG2015
    RG2015 Posts: 6,048 Forumite
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    takman wrote: »
    You can't really think of it that way because they don't need your £2500 in the bank to be able to provide a loan to someone. So they could stop offering the 5% interest but still be able to approve the same amount of loans.
    Interesting.

    So Nationwide currently have £2,500 multiplied by x thousand customers @ 5% on their balance sheet. If they then change their policy they can easily replace this with a different lending stream at less than 5%.

    Therefore the £2,500 at 5% is a simple loss leader with no direct profit benefit.

    I need to get my brain round this.
  • RG2015 wrote: »
    Interesting.

    So Nationwide currently have £2,500 multiplied by x thousand customers @ 5% on their balance sheet. If they then change their policy they can easily replace this with a different lending stream at less than 5%.

    Therefore the £2,500 at 5% is a simple loss leader with no direct profit benefit.

    I need to get my brain round this.
    After 366 days they stop paying 5% interest. The loss leader suddenly becomes a profit maker.
  • takman wrote: »
    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.

    Agree. I've told a few people about switching and they just think it's too much hassle and not worth it.
  • eskbanker
    eskbanker Posts: 37,039 Forumite
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    Katiehound wrote: »
    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!!
    On the contrary, switching statistics by bank, both inbound and outbound, are reported quarterly by BACS, last week's update being published at https://www.bacs.co.uk/DocumentLibrary/CASS_dashboard_-_published_24_Jan_18.pdf

    Granted there's something of a lag, so these relate to Q2 2017, but they are a matter of public record....
  • RG2015
    RG2015 Posts: 6,048 Forumite
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    eskbanker wrote: »
    On the contrary, switching statistics by bank, both inbound and outbound, are reported quarterly by BACS, last week's update being published at https://www.bacs.co.uk/DocumentLibrary/CASS_dashboard_-_published_24_Jan_18.pdf

    Granted there's something of a lag, so these relate to Q2 2017, but they are a matter of public record....
    I think Katiehound may have only been talking about the bank’s own PR.

    At the end of the day, successful banks write their own PR. I have still never understood why First Direct have such a good reputation.
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