I should be celebrating a victory for consumers today after the Royal Bank of Scotland and NatWest announced the decision to scrap bonus-based personal finance products. Instead, I’m left slightly puzzled by the move – especially the axing of balance transfer cards – and wondering if the RBS Group is cutting off its nose to spite its face.
RBS’s plans to axe introductory “bonus rates” on savings accounts follows a similar pledge from HSBC last week, as high-street banks hope to win back public trust.
RBS will end 0% balance transfer credit card deals and plans to make all products equally priced whether applications take place in branch or online.
That’s a lot of changes – not only to its existing product base, but also to the Group’s fundamental principles of selling.
“Bonus rates” have been a useful tool to lure in new customers over the years. These deals typically last for 12 months before reverting to much less competitive rates.
We’ve had a lot to say about them here at Which4U. Bonus rates prey on consumer loyalty and apathy by allowing banks to benefit when customers don’t switch from year to year.
The practice eventually became the subject of an investigation by the City regulator last year. The Financial Conduct Authority queried – as we have done ourselves – whether banks offer attractive bonus rates because they know that apathy makes consumers far less likely to switch once the lower standard rate kicks in.
The results of the investigation are due later this year. But RBS has not waited around for a verdict. Already under severe pressure for offering £576 million in bonuses despite an £8.2 billion loss, it is exploiting a dismal ISA season to restore transparency and trust to its retail savings products.
No longer can new customers expect to join the bank on better terms than existing customers. Nor will they be able to benefit from exclusive offers if they sign up for deals online.
Both of these are commendable moves. It’s hardly the same as a reward for loyal customers; evidently, rewards are restricted to the investment banking division. But it’s a step in the right direction if existing customers are no longer disregarded as flagrantly as they have been in the past.
The reforms also address a major accessibility issue. A research report from the University of Oxford last year discovered that around half of British people with a disability do not use the internet. This restricts a lot of people from the best personal finance products when many of these remain exclusive to online banking customers.
All well and good, then, on RBS’s part?
Well, partly. It’s the reasoning behind it all that seems a bit odd.
RBS chief executive Ross McEwan (right) said he was dismayed to discover the culture of bonus-based products when he arrived from Australia in 2012.
It is unthinkable, he adds, that new customers should be offered better deals than those who have been loyal to a bank for decades.
Fair points, all. But appearing in such shock at this alien ‘bonus rate’ culture is a bit rich. The two countries aren’t nearly as far apart in this regard as he makes out.
Bonus-based products have become increasingly prominent in Australia in recent years. What’s more, because bonus rates in the Australian market tend to be much shorter – 3 to 5 months rather than 12 months in the UK – it requires far more effort from Australians to maintain the best rates.
Scrapping 0% balance transfer cards is also a bit of a blow. It’s hardly as if these are alien to the Australian public either. In fact, they’re something of a favourite for Australian consumers, where finding ways to reduce credit card debt affordably is just as pressing an issue.
Nor do balance transfer cards in the UK present the same kind of covert sneakiness or short-termism that bonus rates on savings accounts do.
One of the reasons why balance transfer cards work well is because of the simplicity in the model. 28 months at 0% tells much of the story, and there are few obvious traps to fall into.
There’s a transfer fee, typically between 1.5% and 3%. Any spending on the card is charged at the card’s purchase rate, and this is normally the rate that remaining debt will revert to after the long introductory period ends. This is largely understood, I think, whereas bonus rates on savings are dealt with in a far more clandestine fashion.
There’s also been healthy competition in the balance transfer market since the New Year, which has pushed the duration of 0% deals up (e.g. Barclaycard) and pushed fees down (e.g. Nationwide). That’s been excellent news for consumers looking for opportunities to reduce their credit card debts.
Withdrawing from that marketplace takes away from the competitiveness, and doesn’t really paint RBS a shade whiter as a result.
Mr McEwan has said that he learnt from Australia that banks could prosper without headline-raising products. “Competitors can do what they like,” he said. Only, this isn’t Australia, and doubtlessly they will.
So, I can’t help wondering if RBS is cutting off its nose to spite its face here. While the move towards equality and transparency is admirable, canning products that offer palpable benefits to consumers makes it more of a muted victory than it might otherwise have been.