Existing customers only?

For quite a few years now, the idea of ‘bundling’ or getting several different products or services from one supplier has been growing in popularity. In the communications market many people get their home phone, broadband and digital TV from one place because it works out cheaper, while in the energy market, dual fuel mean customers get a discount in return for getting both their gas and electricity from the same provider.

This trend is now starting to make its mark on the personal finance market - a number of providers now offer special rates on savings, loans and credit cards to their existing customers, and the RBS Group recently announced that it would be restricting its credit cards to people who already hold a current account with the bank.

But is this the start of a major change in the market or just a passing trend, and what does it mean for customers? We spoke to uSwitch personal finance expert Louise Bond to find out more.

Q. Why do you think banks are restricting products to their existing customers?
Louise Bond - "Banks may be taking steps to reserve the best rates or products for existing customers because it minimises their risk, in what is still a difficult and uncertain financial climate.

"Only lending to customers they already have a relationship with means that the bank will have plenty of information about someone before they lend to them. The bank you hold your current account with will know a lot more about the state of your finances than they could find out from a credit check, so it makes it easier for them to make a good judgement about whether or not to lend to you.

"In addition, many of the banks' terms and conditions state that they have the Right to Set Off. This means they can offset any credit card debts by taking it from your current account. So if you run up bad credit card debts they can take the money straight from your current account, which minimises the banks chances of not getting their money back."

Q. Is this a good or bad move for customers?

Louise Bond - "One negative consequence of this change for customers is that this limits their choice of products. If you look at the market for balance transfer credit cards, the top slot is taken by Virgin at 0% for 16 months, which is open to almost everyone, but then the next three best cards are for existing customers only.

"In addition, some customers may not want to switch to a new current account in order to get a good credit card deal or a cheaper loan. There are plenty of people out there who are happy to go to various providers to get the best possible current account, loan and credit card, and will be unhappy that some of the best products and deals aren't open to them anymore.

"On the other hand, there are some definite advantages too. For people who don't have much of a credit history and who may be struggling to get credit elsewhere, this could be a real boon - their bank will be able to see what kind of borrower they will be without relying on their credit report alone, so they will have a much better chance of getting accepted for a good deal. In some ways, this could almost be seen as a return to old-fashioned banking, where your bank knew you as an individual and considered your applications for credit on the basis of that.

"There will also be those who will praise this move as a sensible precaution to ensure that lending is responsible, and a move away from an era where it was perhaps too easy to get credit."

Q. Do you think the rest of the market will head in this direction?

Louise Bond - "RBS weren't the first credit card provider do this and I certainly don't think it will be the last.

"The trend for offering the best deals to existing customers isn't only a feature of the credit card market - it's happening in the personal loans arena too. The average interest rate for personal loans for existing customers is currently 7.94% APR, while new customers can expect to be hit with an average interest rate for a best buy personal loan of 8.08% - 0.14% higher*.

"More and more banks are also trying to steer customers towards their premium or packaged current accounts, where you get things like preferential savings, loan or mortgage rates and free or discounted insurance products in return for paying a monthly fee for your account.

"However, other banks have publicly stated that at this time they have no plans to go down this path, so it's hard to say right now whether this is an isolated trend or a significant shift in the market as response to the credit crunch at the recession."

* uSwitch.com market analysis 7.10.2009 :

The average interest rate in the Best Buy table for existing customers is currently 7.94%.
Average interest rate in the Best Buy table for new customers is 8.08%.
8.08% - 7.94% = 0.14%

Existing accounts and products from Abbey and Bradford & Bingley will be rebranded with the Santander name - like the current Abbey eSaver Issue 2 , an instant access savings account paying 2.5% AER, and the Abbey Direct ISA Issue 3 , which pays 2% APR.

Some customers may already have seen the impact of the name change with the introduction of products like the Santander Zero credit card, which is popular for its 0% foreign exchange fee, and the Santander Zero current account which offers mortgage customers a fee-free overdraft, no fees for using your debit card abroad and 6% AER on account balances of up to £2500 for 12 months.

The name change will affect some 25 million customers, and comes after the Spanish banking giant's purchase of Abbey in 2004 and Bradford & Bingley and Alliance & Leicester in 2008.

Founded in 1857, Santander is one of the largest and strongest banking groups in the world, with over 90 million customers, 170,000 employees and more branches than any other international bank.

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