Consumers are electing to stay with their current bank due to costs and barriers to exit in place to keep them with the institution a new report has found.
The report from business intelligence provider Datamonitor has found that customer loyalty in financial services is closely tied to the perceived effort of switching bank. This finding comes despite efforts from regulators to make switching easier in an effort to increase competition.
“Barriers to exit in financial services currently have a higher impact on customer retention than factors such as satisfaction. For transaction accounts the effort involved acts as a deterrent to switching, while for mortgages exit fees serve to lock customers’ in” says Petter Ingemarsson, Senior Analyst at Datamonitor and author of the report.
In the mortgage space, exit fees are commonly applicable for customers refinancing within five years. These fees remain a source of controversy and the subject of scrutiny by media and regulators alike. While the government has pledged to put downward pressure on such fees, the banking industry argues that exit fees are necessary to recoup costs associated with a switching mortgage customer.
However, in a 2008 review performed by ASIC, the regulator noted: “As the prevalence and level of early termination fees has grown, some do not appear to be related to the underlying costs they are purporting to recover.” Consumer advocates have argued that exit fees allow lenders to raise rates with impunity as the customer may not afford switching.
The government is in the process of introducing legislation to limit exit fees.
“There is a balance that must be struck when approaching such regulation. On one hand, consumer protection from unfair or deceptive practices should be guaranteed, but on the other hand, overregulation can lower the efficiency of Australia’s well-functioning financial system. As always, mortgage customers need to closely examine the fine print of contracts and to make a trade-off between features in a way that suits their particular circumstances” concludes Mr Ingemarsson.