People aren’t Taking to Current Account Switching in Great Numbers. Do They Have Trouble Comparing Current Accounts?
The current account is the most prevalent kind of bank account in the UK. According to a report by the OFT, called Review of barriers to entry, expansion and exit in retail banking, 93% of adults in the UK hold at least one current account. While consumer review websites are full of consumer complaints against banks, account holders rarely try to switch accounts. Before the Current Account Switching Service launched in September 2013, the difficulty involved in switching current accounts could have easily accounted for the lack of consumer interest in the activity.
Now that switches easily go through in 7 days under the new system, what could explain consumer reluctance to switch? A report by the Treasury Committee may have a clue – current accounts are advertised in such a confusing and opaque way that consumers have no way of identifying deals that are better than what they have.
The barrier of confusion
When consumers need to compare different current accounts for their overdraft policies, they lose their way navigating confusing terminology. For instance, some accounts advertise interest-free overdrafts. While consumers may take the term “interest-free” to mean that they are free, banks using this term mean that they charge their customers through flat daily fees, rather than an interest rate.
Many banks advertise their basic accounts as “free banking” accounts and market them at low income consumers. Consumers holding these accounts, though, pay an average of £150 each year operating these accounts. They pay in the form of overdraft fees and other penalties.
The lack of clarity can be so serious that people often turn to payday loans that charge a clear 5,000% APR rather than risk making use of a current account overdraft that is unclear about what exactly it charges (in reality, some banks charge their current account holders overdraft interest rates that are far higher than what payday lenders charge).
Even when banks try to publish details about their current accounts in easy-to-understand terms, the sheer volume of the choice available – different account plans, overdraft plans and interest rate plans – can take away any benefit that the clarity may bring.
The barrier presented by inadequate choice
Three-quarters of the UK retail banking market is locked up by just four major banks. Many critics of the British banking system consider the banking system an oligopoly – a market that features poor competition because it’s owned by just a handful of giant businesses. With little competition to worry about, the large banks have no incentive to advertise their products properly or to explain to consumers how their plans are different from what the competition offers.
The lack of options is clear in the way consumers carry out their banking activities. Reports by consumer organizations find that half of all people applying for home loans or personal loans go directly to the bank that they have their main current account with. They don’t believe that they have real choice.
What should consumers do?
Consumer groups have various ideas on what can be done to encourage consumers to actively look for alternatives and switch current accounts. Some have suggested that banks should send their account holders annual statements that help them see exactly how much they pay in fees, interest and penalties. Every bank could be required to advertise its offerings in the same format to allow easy comparison.
Until banks make their product offerings easier to understand, consumers should view choosing banking services the way they would any technical matter. Just as they would turn to expert reviews and recommendations for help choosing mutual funds or stocks, they should turn to trusted expert recommendations for help finding the best bank account deals.
When experts make recommendations, they aren’t usually taken in by simple myths the way regular consumers are. For instance, experts are more likely to give small banks like Handelsbank and Metro Bank a chance because they are able to study their background, the management teams behind them and the policies they use. Regular consumers, on the other hand, are likely to dismiss these banks as too new and untested. These banks offer consumers real choice – transparent fee schedules, more generous overdraft rates and better interest rates.
Launched in March 2013, the Santander current account has been lauded by experts as the UK’s most generous current account in terms of customer rewards, according to The Daily Mail. If you are considering making the change to the Santander account, here’s what to expect in terms of risks and rewards.
The Santander account offers you cashback on purchases at a tiered system of 1-2-3. For example, the 1 stands for 1 percent cashback you receive when you use the Santander card to pay water and council tax bills. The 2 stands for 2 percent cash back on electricity and gas bills while the 3 percent stands for cashback on bills paid to mobile, home phone, broadband and on-demand television packages. You can set the account up as either a single or joint account based on your and your partner’s unique needs.
The 1-2-3 comes into play in another way. You also earn interest based on the amount of money you keep in the account on a monthly basis. For example, if you keep £1,000 or more in the Santander account, you earn 1 percent interest on this amount. If you carry a balance of £2,000 or more, you will earn 2 percent interest each month. When your funds exceed £20,000, you will earn 3 percent interest for your account balance, which is the maximum interest rate you can earn with the Santander account.
If you are curious if you could benefit from the Santander account, visit the company’s website at Santander.co.uk and go to the 123 Santander page. In the “What You Get” area, there is a cashback calculator. This allows you to put in your typical utility bill information to determine how much money you could get back. You also can view a list of utility providers to ensure your provider is a member of the cashback awards program.
The Fine Print
You must meet a few basic requirements to qualify for the Santander 123 card. For example, you must be older than age 18 and a permanent UK resident. In addition, you must keep a balance of at least £500 in your account and use at least two direct debits per month.
Remember that you will only earn the cashback rewards for the Santander 123 card if you have at least £1,000 in your account. If your balance drops below this amount, you will not get the cashback. To maximize the amount of interest you earn each month, follow this strategy: Keep as much money as you possibly can in your account for as many days as possible. To get the cashback rewards on your utility bills, they must be from direct debits. If you do choose to utilize direct debits, you may wish to set them all for the end of the month to maximize your interest.
You must pay a small fee to receive these benefits. The Santander card costs £2 each month to earn the cashback perks. Unlike some other cashback cards that pay once per year, the Santander card will pay cashback rewards on a monthly basis.
If the Santander 123 account does not appeal to you, but you wish to stay with the Santander company, you can choose its Everyday account, which does not offer cashback or charge a fee for holding the current account.
Making the Switch
Santander is a member of the Current Account Switch Service (CASS) that will switch your bank accounts within seven business days upon your request. The CASS system ensures you can switch your account in a hassle-free manner. If any details of the account do slip through the cracks, such as direct debits from the old account, the responsible bank must cover the costs associated with the error.
Pre-paid credit cards are available from most banks and other financial institutions that offer standard credit cards to consumers. You can also purchase pre-paid cards at some large retailers. Although most consumers prefer to carry standard cards, a pre-paid card might be a valuable addition to your financial portfolio. Like other types of cards, these cards have both advantages and disadvantages.
Advantages of Pre-Paid Cards
This type of card is available to anyone regardless of credit history. This is because instead of the issuer extending credit to you, your purchase amounts are deducted from funds you load onto the card. If you do not have sufficient funds in your card account, the issuer will simply decline the charge request. Because you do not need a good credit score to qualify for a pre-paid card, this can provide you with credit card access even if you have made late payments or other credit mistakes on other accounts in the past.
It prevents you from accumulating debt that you cannot repay. Because you are limited to the amount you have loaded onto the card, you can ensure that your purchases will not put you in jeopardy of default. This can be a significant advantage if you are living on a tight budget and do not want the added expense of credit card payments and interest charges.
A pre-paid card reduces or eliminates the need for carrying cash. If your cash is lost or stolen, you have little recourse to recover your money – in most cases, it is gone forever. By carrying a pre-paid card instead of cash, you have a level of security to protect your money. If your card is stolen or lost, you would simply need to report the loss to your card issuer. The company would then freeze the account to prevent another person from accessing your available funds. Using a pre-paid card instead of cash also makes purchases more convenient – in most cases, you can check out more quickly with a card than you could by paying with cash.
Carrying pre-paid cards can shield you against financial disaster while you are on a holiday or business trip. It can prevent you from spending more than you intended so that you won’t worry about how you will repay your debt when you return home. Also, you have the ability to freeze the funds in the event of card theft or loss. Even if another person is able to make purchases with the card before you contact the issuer, your liability would be limited to the amount you have loaded onto the card. This can provide a safe way to access funds while you travel without the risk of a thief amassing exorbitant charges in your name.
Disadvantages of Pre-Paid Cards
Not all retailers and servicers accept these cards as payment. Typically, you cannot use a pre-paid card to pay for a car rental, airline ticket, or cruise ticket. Likewise, some utility companies do not accept these cards for invoices. Companies also do not accept these cards for services and products that must be paid for on an ongoing subscription basis. It is important to check with a servicer or retailer before you rely on a pre-paid account to pay for a purchase.
A pre-paid account might not help you build a solid credit history. Many issuers do not report timely payments to the major credit bureaus, which means that you do not have the opportunity to establish the credit history to qualify for cards, credit lines, loans, and mortgages in the future. This can be a significant disadvantage if you have not established a credit history or are attempting to repair your credit. Ask the issuer about reporting before you apply for a pre-paid card.
You will not have access to incentives and rewards available through standard card issuers. Some companies provide incentives such as cash back and rewards points to standard cardholders. Applying for a pre-paid card prevents you from taking advantage of rewards that could save you money or allow you to accumulate credits for special purchases.
Even with the disadvantages of pre-paid credit cards, the benefits make carrying this type of card worthwhile. At the very least, it gives you a convenient payment option when you don’t want to use a standard card for everyday or travel purchases.