Actionable Insights From APT's Financial Services Practice

Making the Switch: UK Legislation Makes it Easier to Move Between Banks

January 20th, 2014 | Posted by JDouglass in Financial Services

In a move to make it easier for consumers to switch banks and to increase competition in the banking industry, the Payments Council of the UK has rolled out a “current account switch service” to speed up the process. The service will switch a consumer’s current account to a new bank within 7 days by transferring funds between banks, moving all standing direct debits to the new bank, and automatically redirecting any payments accidentally made from the old account to the new account for 13 months. While participating in the service is not mandated by law, 33 institutions have already enrolled.

Many banks have been using the service as an opportunity to increase their current account market share. This is creating an incentive war among UK banks, both large and small: for example, First Direct is offering £100 to customers who switch from another bank and another £100 if they aren’t satisfied within the first 12 months. Nationwide is offering 5% interest on their FlexDirect account for the first 12 months, and Santander is offering 4 free months of Arranged Overdraft for switching customers.

Though this legislative event creates many opportunities, banks also risk losing a large number of valuable customers, taking on unprofitable relationships, or unnecessarily subsidizing some customers who may have switched anyway. Banks need to consider the following issues when offering incentives for customers to switch accounts:

  1. What strategies really prevent your most valuable customers from switching?
  2. Are the costs of the incentive, both implicit and explicit (e.g., £100 + marketing costs + labor) going to pay back? What is the optimal level of incentive?
  3. What kinds of customers are we acquiring when we offer incentives to switch? What is the lifetime value of each customer? Since switching is now relatively hassle-free, banks may be acquiring customers who are simply shopping around for the best rate or fee structure and who may be prone to switch to another bank in a few months.

The best way to figure out which incentives are most profitable is to test each one with some customers and not others to determine the accurate incremental impact of each strategy. To read more about similar tests that APT has conducted with major financial services clients, click here.

As the switch service nears its 5 month anniversary, the Payments Council has begun releasing figures about how impactful the program has been. The Telegraph reports that current account switching from October through December of 2013 increased 17% year-over-year, with a 54% increase in December over the previous year. The Payments Council also launched the second wave of advertising around the program in January, and as they continue to promote the service, banks will have to carefully consider the incentives they offer, and whether the new customers they are acquiring will be profitable in the long term.

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