QoD: Savers in England received information about rival banks with higher interest rates. What percent were prepared to switch banks?

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Aug 25, 2019
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Question of the Day, Savings, Checking Accounts, Behavioral Finance

Answer: 3%

Questions:

  • If you could make an extra $100 in extra interest by switching banks would you do it? How about $20 in extra interest? 
  • Would the amount of time required to open a new bank account impact your willingness to switch banks? Explain. 
  • Why do you think so few savers were ready to switch banks despite a potential benefit of $150 in the first year?

Click here for the ready-to-go slides for this Question of the Day that you can use in your classroom.

Behind the numbers (from the Economist; sub. required):

The authors conducted a randomised trial with 124,000 British savers with savings accounts at five institutions. These are simple products and the main salient feature is the interest rate.

Savers were given information about rival accounts that offered higher rates. On average switching would have taken around 15 minutes and made them £123 ($153) in the first year. But only around 3% were prepared to switch. The academics experimented with ways of displaying the information to make the benefits clearer. Enhanced disclosure made switching a bit more common, but not much.

The most successful approach increased the share of customers switching to just 12%. Neither a saver’s age nor the balance in the account made a difference. The authors concluded that savers doubted the benefits of shopping around and were put off by the perceived inconvenience. “Caveat emptor”, it seems, may apply in principle but not in practice.

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.