How do banks profit from paying switching fees?

EachPenny

eskbanker wrote: »

On the contrary, switching statistics by bank, both inbound and outbound, are reported quarterly by BACS, last week's update being published...

And from the Commentary section of the report:-

Reflecting on the published gains and losses of participants in Q2 2017 (available in this dashboard) interestingly five out of the six banks or building societies to have recorded a positive net gain during the quarter all offered a switching incentive, or increased interest rate during this period, which is likely to have had an impact on switching rates. As previously discussed in our range of research papers, product innovation and promotion is key to prompting customers to consider whether they should switch current accounts.

Well I never

eskbanker

EachPenny wrote: »

Well I never

....and in next quarter's exciting instalment, we offer insightful analysis as to the arboreal defecatory habits of ursine mammals!

RG2015

eskbanker wrote: »

....and in next quarter's exciting instalment, we offer insightful analysis as to the arboreal defecatory habits of ursine mammals!

Or bovine perhaps?

EachPenny

eskbanker wrote: »

....and in next quarter's exciting instalment, we offer insightful analysis as to the arboreal defecatory habits of ursine mammals!

They did however miss the startling revelation that the scale of the generosity of the 'five banks' broadly correlates with their number of net gains.

Thereby proving that you can indeed buy customers

ValiantSon

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!!

No corporate investor would fall for that. Due diligence checks would easily find it out.

ValiantSon

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.

They won't earn 5%, let alone more than that! It is a loss leader.

RG2015

ValiantSon wrote: »

They won't earn 5%, let alone more than that! It is a loss leader.

Yes, it is a loss leader but are you saying that Nationwide never charge anyone 5% or more plus fees for any financial product?

ValiantSon

RG2015 wrote: »

Yes, it is a loss leader but are you saying that Nationwide never charge anyone 5% or more plus fees for any financial product?

No, I'm not saying that they have not, and will never, charge 5%, but n the current market they cannot expect to make 5% return. Their current typical APR for a personal loan is 3.4% and their current standard variable rate on mortgages is 3.99%. Clearly, both of these are significantly below the 5% they are paying on the first year of a FlexDirect account.

Furthermore, lending is not actually based directly on capitalisation, i.e. they will lend more than they hold in deposits by borrowing at the LIBOR rate and using Floating Rate Notes, which will generally be higher than LIBOR.

You should not look at a direct correlation between rates to borrowers and those to lenders. Yet even if you do you will see that Nationwide loans do not bring in as much as they pay out on FlexDirect in the first year on a pound deposited to pound loaned comparison.

Nationwide lose money on the 5% offer. They hope that customers will stay with them beyond the one year, when the interest paid out falls into a theoretically profitable range, but they will still not enter profit for some time. Additionally, and this is quite significant, they hope to upsell additional products by having an associated audience for their marketing and generating brand loyalty so that people go to them as a first choice for new products.

The switching bonuses will come out of the existing marketing budget, and so the money will be spent here rather than on newspaper, TV, billboards etc. They are not profitable in terms of those who regularly switch - chasing the bonus - but the majority of those who switch don't keep switching in search of the latest bonus, and they then become more profitable the longer they stay (and purchase more products).

RG2015

ValiantSon,

Thank you for this erudite, comprehensive and persuasive missive.

It explains what the banks aim to achieve and that for the most part that they are successful.

Nevertheless I cannot lose the feeling that something is rotten in this particular state of Denmark

EachPenny

ValiantSon wrote: »

Additionally, and this is quite significant, they hope to upsell additional products by having an associated audience for their marketing and generating brand loyalty so that people go to them as a first choice for new products.

Like a credit card at up to 17.9% interest ('free' for the first year).