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When it comes to switching utility providers, consumers are aware of the potential savings to be made by shopping around and comparing prices in the market. This ultimately leads to more competition and better prices for customers. However, when it comes to switching bank providers, we are reluctant to switch and less likely to engage with banking markets. Could this be stopping us from making potential savings?
ESRI’s Behavioural Research Unit (BRU) published a report on 4 April titled Switching Activity in Retail Financial Markets in Ireland. The research commissioned by the Department of Finance surveyed a national sample of 3,000 consumers. It highlighted consumers are missing out on better rates by not engaging in the market and comparing prices when buying financial products.
Behavioural insights
Shane Timmons, senior research officer with BRU, explains that the research was carried out to get an understanding of why people switch or fail to switch based on the psychology and behavioural economics of decision-making.
“With it, we focused on the main products people hold, bank accounts being one but probably more importantly from a switching perspective, mortgage, credit cards and loans,” says Shane.
With two providers, Ulster Bank and KBC, leaving the market, the effect on switching rates even with national awareness campaigns was minor.
“We see slightly inflated [switching rates] for bank accounts, but really surprisingly low rates across the board, especially considering that activity. It lines up with research internationally that generally consumers don’t really switch,” he explains.
Findings of the report
The research found, when choosing their bank account, 73% of consumers in the study did not shop around. The figure was 68% for loans and 74% for credit cards.
Even when getting a mortgage, 46% of participants did not compare offers, despite differences in interest payments that can add up to tens of thousands of euros.
Once consumers have these financial products, most do not consider switching to better-value ones. Shopping around appears to be a habit. The same consumers who compare offers when initially purchasing financial products are also more likely to switch in future. The main motive is to save money rather than to get new features or better service.
Barriers to switching
Difficulty in comparing offers, uncertainty about the process, the cost and benefits of switching and the fear of making a mistake have emerged as significant barriers to switching across financial products. Another barrier customers face is the significant time investment and paperwork required to make the switch.
Consumers have reported facing more difficulties when considering switching their mortgages compared to switching other financial products.
Shane advises mortgage holders to engage in the market and compare your rate to other offerings using the Competition and Consumer Protection Commission (CCSP) comparison tool. “It will tell you how your mortgage compares to everything else in the market. People think that if they have a fixed rate [mortgage], they’re not able to switch. There can be a fee for switching out of a fixed rate but it can be worth it on balance and they could be covered by cashback.
“It is worth considering what is out there in the market.”
Switching activity
Relatively more people will switch their electricity provider every year, or their broadband provider. They are aware of the benefits of switching and will engage with providers. The same applies to financial products.
When applying for bank accounts, credit cards, loans or mortgages, people rely on personal recommendations or a bank they use already, despite better-value products usually being available elsewhere.
Switching rates across these four products ranged from 6% to 17% over five years. Most people are aware that switching is an option but cite difficulty comparing offers, costs, time, uncertainty about the process and worries about making a mistake.
The research carried out in this study also found women are less likely to report switching, but this could be because women are more honest in their responses to research. According to Shane, one of the reasons we might expect women to report switching less is that one of the barriers to switching is uncertainty and fear of making a mistake.
“One of the most reliable gender differences we see in psychology and behavioural economics is that women tend to be more risk-averse. They prefer not to take risks. In most areas of life, not taking the risks is probably a better thing,” he says.
“In this instance, having that confidence to look around and engage with the market is more beneficial.”
Better interest rates
One of the biggest benefits of switching providers is the potential for better interest rates. Interest rates can vary greatly between banks, and it is not uncommon for some banks to offer much higher rates than others.
Using the CCPC’s comparison tool to compare the average mortgage figures, the differences in monthly payments vary from €600 to €1,000 a month. This is a huge variation that you might not expect. Similarly with loans you can save €1,000 on the cost of the average loan by going to the lowest provider compared to the higher ones.
Lower Fees
Another potential benefit of switching banks is the opportunity to lower your fees. Some banks charge fees for everything from checking account maintenance to ATM withdrawals.
Increased competition
If more people switch, it increases competition between the providers. Service providers are incentivised to offer lower interest rates to get more people to switch to them and attract clients.
It is important to visit each bank’s website for full details about their services. With a small amount of banks in the market at the moment, Shane says, “there’s a surprising amount of variation in the interest rates.”
“The best thing we would like to see come out of it [the study] is just more people actively engaging with the market,” he adds.
Shane advises younger readers that are thinking of taking out these services to shop around. “We found that for people who shopped around, it gave them that confidence in the market. If you shopped around first then you were more likely to switch down the line. Engage with the market as early as possible, it’s never too late.”
For more information on the report visit www.esri.ie/news/consumers-miss-out-by-not-comparing-offers-from-bank
Mortgages
Based on the average house price of €310,000 and assuming a 10% deposit (eg for a first-time buyer), the monthly repayment rates at the moment range between €1,100/month and €1,700/month. Over the lifetime of the mortgage (35 years), this compounds to more than a €200,000 difference in the total cost of the loan.
Loans
The variation amongst providers for a loan of €10,000 over a period of two years can be seen below (calculated using CCPC money tool).
CCPC money tools https://www.ccpc.ie/consumers/money-tools/
*APR: Annual percentage rate, is the interest rate for a whole year, rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card.
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