Why 0% BT cards and teaser rates have no role to play in customer centric banks

The announcement by Ross McEwan, RBSG CEO, that RBS and Natwest will remove
teaser rates from savings products and scrap 0% interest credit card deals is
another step on the road to recovery for RBSG. RBSG is not the first banking
group to identify the unfairness for existing loyal customers when these types
of offers are made to new customers. It is however the first of the Big Five UK
banks to make this stand.

Banks that scrap short term special introductory rates on products for
customers, while they position this as for the benefit of existing customers
are not simply being altruistic. They are doing this because they know that by
adopting a customer- rather than a product-centric approach to running their
bank there can be a significant improvement in the long term profitability of
their businesses.

Over the past few years there has been a significant price war in the 0%
Balance Transfer (BT) credit card market. As one competitor has extended the
length of the 0% interest period by one month the next has extended it a
further month. Six months ago the market thought that no one would go further
than a 28 month (2 years three months) period but it has now got to the point
where Barclaycard is offering a 31 month interest free period. It could be
argued that this is really good news for customers as fierce competition is
driving better deals for consumers. However what is interesting to note is that
the top three places in the BT card table are all being offered by one of the
Big Four banks – Barclays, HSBC and Lloyds Banking Group. With their very large
deposit and current account bases they have large amounts of low cost money to
lend which they, it could be said, are using to keep other competitors out,
particularly the smaller players who have to resort to the wholesale markets to
fund these loans. By extending the periods so long it makes it too expensive
for smaller players to compete.

But why are the big banks so keen to lend customers money apparently free
for so long? There is of course an up front a fee based on a percentage of the
balance being paid – in the case of Barclaycard it is 3.5% which is reduced to
2.99% by a refund (nothing like simplicity!). What this gives the banks
offering these products is short term fees, which, with interest rates being so
low, fee income is particularly important for short term profits. None of the
banks that offers these products has a competitive APR (Annual Percentage Rate)
for additional transactions. The banks also know that these are customers who
do not pay off their credit cards every month otherwise they would not have got
a balance to transfer in the first place. Until recent regulation came into
place forcing banks to pay off the most expensive debt first (in this case the
new transactions not the 0% balance) this was almost a licence for banks to
make money as every payment customers made was used to pay off the 0% balance
meaning every new tranaction that was rolled over the month end would continue
to rack up high interest rate charges. Even with the change in legislation,
whilst these cards are positioned as a way for customers to pay off their
debts, the banks concerned are certainly hopeful that their customers will
continue to use their credit cards accruing the bank interchange and other fees
for every transaction as well as building a large balance for when the 0%
interest rate expires.

The problem with BT customers is that they have had the nous to transfer the
balance for a 0% period. This means that they are likely to be price conscious
and therefore when the next good deal comes along or when their free period
ends some of them are likely to be off again to the next bank or credit card
company offering a good deal. Others are likely to rack up debts that they
cannot afford and go into arrears. For a bank that is looking to develop long
term mutually profitable relationships with its customers the majority of these
are the wrong type of customers. These are not customers who are looking to or
have the money to take out other products from the bank. Banks who offer these
types of products are, on the whole, product-centric. Banks who the only credit
card they offer is a Balance Transfer is not customer centric.

Moving onto the removal of teaser rates from savings products. The primary
reason banks offer short term attractive rates is to build volumes of deposits in
order to be able to lend the money out to other customers in the form of a loan
or mortgage. It is also a way of raising the brand of the bank by getting it
into the best price tables, on the first screen of the aggregator websites such
as Moneysupermarket.com and getting it mentioned by Money Savings Expert Martin
Lewis. However being successful at doing this can have at least two downsides.
Firstly the bank can end up with more low or no margin deposits than it has the
demand to lend which leads to losses and secondly it attracts price sensitive
customers aka, price tarts. The problem with price tarts, as the name implies,
is that as soon as the introductory rate expires they will be off taking their
money and giving it to the next bank that has decided to get offer a teaser
rate. Just like the with Balance Transfer Card these are not the types of
customers that a long term profitable bank should be built upon. With both
product strategies it is a case of quantity being sacrificed for quality and
taking a product perspective over a customer one.

However  it would be wrong to think that
there are no downsides to a strategy that strictly adheres to the principle
that existing customers should never be disadvantaged over new customers. In
2001 Nationwide Building Society, under the previous CEO, introduced a policy
that all its mortgage offers would be made available to both new and existing
customers. It resulted in retaining a higher proportion of its mortgage
customers than other banks but with significantly impacted profitability.
Nationwide has moved away from that purist implementation to a more pragmatic
approach. It doesn’t seek to be in the top of the price tables for its products
but rather it seeks out customers that are looking for a long term relationship
with the building society as its Save to Buy offering for first time buyers
illustrates. The result has been a very significant growth in profitable

Ross McEwen sees the turnaround of RBSG as taking at least another five
years. The announcements of the changes to the retail product strategy will
potentially have a negative short term effect for the retail bank, but in terms
of moving RBSG towards being a customer centred bank these are sensible steps
as long as the shareholders and other interested parties have the patience to
see them through. What he has recognised is that 0% cards and teaser rates have
no role to play in a customer centric bank.

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