THE HOUSE THAT LOYALTY BUILT

Historically the banking industry has been tarnished with what’s referred to as the 'loyalty penalty' brush; it is perceived that loyal customers are offered a worse deal than new customers on everything from house insurance and energy to home loans.

With mortgages, many people will have experienced being put on a more expensive standard variable rate as soon as their fixed-term deal has come to an end. This effectively punishes the consumer the longer they stay with the bank. Where is the incentive for the consumer to remain loyal? If they need a bank loan, home insurance, a new credit card, why would they consider the bank that they believe to be ripping them off with their mortgage?

Yet in recent years, banks have slowly realised the benefits of loyalty and are beginning to introduce products and services to reflect this. These baby steps started with equality of interest rates offered to new and existing customers. Before long there was some financial advantage for existing customers over new customers, with lower admin fees being charged, and some fees being scrapped altogether.

Other banks, such as Santander, have started offering discretionary rates to existing customers. They do not publish a range of rates but rather negotiate a rate on a case by case basis (thisismoney.co.uk).

This not only gives existing customers better rates than are offered to new customers, it also gives them the confidence to negotiate on other services they may want to apply for. If there is a belief from consumers that their current provider is open to negotiation and prepared to listen to their personal circumstances, this will reduce the chance that they will shop around in future.

In 2018 twice as many borrowers renewed their mortgages with their current provider instead of switching to a new one (Source: UK Finance). This shows that a reduction in fees is slowly building loyalty between banks and their customers.

BUT LOWER COSTS ARE ONLY THE START

With the BoEs interest rate at 0.1% and interest rates for mortgages as low as 1.1%, now would seem like the perfect time to buy a home or renew a mortgage. However, living in an uncertain world caused largely by the COVID-19 pandemic, many have understandably been put off.

With weeks on end with no house viewings due to lockdown, followed by reduced viewings with social distancing measures in place, new mortgages have slowed massively, meaning renewals are now more important than ever to banks. By beginning to think about their current customers and how to retain them - rather than solely trying to acquire new customers - they have increased the number of mortgage renewals with existing customers which has eased the financial impact banks would otherwise have faced during this pandemic.

Although it has taken a shock to the system to instigate it, banks are slowly starting to appreciate the benefits attached to loyal customers, rather than focussing almost exclusively on attracting new ones. Namely, the ability to offer more competitive rates depending on their credit history, and avoiding the steep marketing costs associated with gaining new customers.

By understanding their customers’ thinking when it comes to financial services, banks can increase the number of products and services their average customer has with them, because ultimately they’re striving to be the sole provider for any given customer.

Whilst mortgages are the most profitable service for retail banking, it’s important not to focus only on this. Looking after their customer base during these testing times, whether it be with great customer service, credit card/mortgage/loan holiday repayments, or just remaining open for business as usual, banks can change their customers’ perception of them in a positive way, leading them to think of their current provider first for any new products or services they may require.