Banks look to cash in on customer loyalties

Public opinion of the banking industry has rarely been lower, but Britain's biggest banks are playing on loyalty more than ever before as they try to retain their best customers.

And while loyalty doesn't always pay for consumers, competition is heating up in the current account market as the UK's biggest banks try to tie people into more lucrative products.

Banks and building societies have long sought to sell existing customers other products. Branches are full of literature promoting home insurance, savings accounts and loans and many conversations with bank staff end with them asking if you would be interested in any of those products.

Current accounts remain the best way to cross-sell, with banks looking to build up their customer base as the move towards fee-based banking accelerates. Banks are taking advantage of low levels of account switching by targeting existing customers with mortgages and, increasingly, savings deals.

Current accounts also give banks valuable information on their customers, including their credit records and spending patterns, making it easier to target them with exclusive offers.

The problem for consumers is knowing when the bait is actually worth going for. Because while it sometimes makes sense to take, say, your mortgage, current account and savings with one bank, it may mean missing out on better deals elsewhere.

Conversely, there is a risk of people signing up for products that they don't need just so they can get a slightly better deal on another product - exactly the mistake that providers are banking on.

David Black, head of banking at researchers Defaqto, said: "Having the main current account of an individual is the key relationship builder for the banks and there is an increasing emphasis on focusing marketing efforts upon such existing customers."

In its recent annual report, Lloyds Banking Group said it wanted to "build deep and enduring relationships" so that its customers choose "Lloyds TSB, Halifax and Bank of Scotland for more of their financial needs".

So, how are they going about it? Attractive savings deals are the main bait right now, which is one reason why the number of free current accounts with decent in-credit interest rates is dwindling. In 2008, more than three-quarters of current accounts paid some in-credit interest, averaging 2.13 per cent. That has slumped to just over four in ten now, with the average rate down to 1 per cent, said Black.

Instead, the big savings deals are increasingly on products linked to current accounts and available only to existing customers.For example, HSBC has a regular saver account that pays 8 per cent (gross), but it's only available to HSBC customers in its premier, advance, passport or graduate accounts.

Santander currently has a 6 per cent monthly saver exclusive to those with a Santander bank account. It also has a "first home saver" account paying 5 per cent that is available only to first-time buyers aged under 35.

Several of the "best buy" accounts offering attractive in-credit interest require a minimum amount to be paid in each month. The Bank of Scotland reward current account pays 5 a month provided 1,000 is paid in, while Santander's preferred-in-credit account pays 5 per cent fixed for a year on balances up to 2,500.

These deals are designed not only to get more people into current accounts, but also into fee-based packaged accounts. Fee-charging accounts now outnumber standard "free" current accounts, according to Defaqto, with 72 different packaged accounts available that cost up to 25 a month.

Another trend to emerge in recent months has been to link savings accounts with investment products. For example, Yorkshire Building Society's combination bond pays 5 per cent for a year - significantly higher than the best rate available without opening another product. But there's a catch - to qualify for it, savers have to invest 5,000 into a Legal & General investment bond.

The Isa season has produced a new batch of linked savings products. The Santander super flexible Isa pays 4 per cent for a year, but to be eligible you have to invest an equal amount in a qualifying investment product. The lure is that the Isa rate is 0.9 per cent higher than the best Isa that doesn't involve a linked product.

Michelle Slade, of Moneyfacts, said such deals only work for those looking for both a savings account and an investment product - not one or the other.

"In a period of low interest rates, these deals are more tempting for savers. But investment products are higher risk than savings products, so savers would be better off getting independent financial advice before committing to such deals to ensure they are suitable."

It's vital to scrutinise the investment element particularly closely, given the heightened risk of losses. If the investment isn't a competitive product, a good savings deal isn't sufficient to make it one.

As for mortgages, more lenders are using the lure of better rates to get borrowers into products such as insurance and savings deals knowing that, for many people, decent mortgages are hard to secure. One in ten loans currently available is restricted to the lender's current account customers, compared with less than 2 per cent in summer 2009, according to Defaqto.The recent peak was in June last year, when 441 of the 2,773 deals on the market were offered only to the lender's existing customers, although experts predict the proportion will rise again.

NatWest, Royal Bank of Scotland and HSBC all offer reduced mortgage fees to selected current account customers, usually those in certain packaged accounts.

Similarly, Lloyds TSB, Barclays and Santander have been particularly keen to offer preferential mortgages rates to existing current account customers.

The trend is extending to loans and credit cards, with more of the best deals exclusive to the lender's current account customers. HSBC, RBS, Barclays and Santander all offer preferential rates to existing customers, although not all of those rates are advertised.

If you're considering a product where there is a tie with another service or offer, decide first if you actually want all of the services included.

Black said: "By all means have a look at the linked products, but do bear in mind that there may be a better deal elsewhere so it is still worth looking around the whole of the market for the most appropriate deal for your circumstances."

Everyone's circumstances differ so it is impossible to say that such and such a provider is the best for all products. So it is down to the individual to see past the headline advantages promoted by their bank or building society and look at how it fits into their own finances.