Banking gimmicks are no bad thing

Bonds with temporary bonus rates, current accounts with switching incentives: banks are frequently bashed for their gimmicky products. But would we really be better off without these deals?

Banking gimmicks: juicy meat for the consumer champion. Be they bonus savings rates or reward current accounts, thousands of column inches and pixels are devoted to these supposedly underhand tactics every month.

This anger with so-called financial gimmicks has reached such a level that a new breed of banks has emerged, offering products ‘with no strings attached’. Brands like Virgin Money and Metro Bank tout savings accounts with no bonuses, along with friendly and quirky customer service.

But are we really better off without these gimmicks?

Easy access savings accounts

Savings accounts are a prime territory for banking gimmicks, particularly easy access deals. These accounts will usually offer a temporary interest rate that drops off after 12 months, leaving you with a pitiful return. If you want to keep a decent rate, you will have to switch.

Take a look at the table below showing the three best easy access savings bonds and the three best easy-access ISAs:

So, all the accounts hover between 3.00% and 3.50%, but they all also come with bonuses that will drop away after 12 months and bring down your rate. At this point you will need to switch.

Switching to the ‘no-gimmick’ accounts that do not have bonuses, the best around is Sainsbury’s Bank’s eSaver Special, offering 2.90% on a minimum investment of £1,000. Next is the Virgin Money Easy Access E-Saver. This pays 2.85% on deposits from £1.

Both of these accounts have variable rates, so they could change eventually. But the fact that there is no packaged bonus does give you a little more reassurance that the rate will remain static for a longer period of time.

However you will pay for this peace of mind. The Sainsbury’s account has a rate 0.25 percentage points lower than the top paying account. Is this an appropriate price to pay for a permanent rate? Well, that’s for you to decide. But what is certain is that you will get a better return if you keep switching every year – especially when the base rate eventually rises.

Current accounts

Current accounts are another hot bed of enticing add-ons – just take Santander’s new 123 current account. The deal pays cashback on your direct debits: 1% on water and council tax, 2% on gas and electricity and 3% on phone, broadband and paid-for TV bills. To qualify for this account you will need to pay a monthly fee of £2 and pay in £500 per month.

When the account was released, we worked out that a regular couple could make around £60 per year cashback from this account – a pretty good deal for just switching your direct debits over. There are some that will just see this as a gimmick though, especially when you consider Santander’s chequered customer service past.

But the Spanish bank is far from the only provider throwing some extras perks into the current account mix. Halifax’s Reward Account offers £5 cashback in each month you pay in £1,000, while the First Direct 1st Account will pay you £100 for switching and another £100 if you decide to leave. Nationwide also offers free European travel insurance with its FlexAccount.

Free perks like these can’t be a bad thing, providing you are receiving good service in addition to the bonuses. After all, when it comes to current accounts, most of us just want reliability.

The gimmicky current accounts you should really watch out for are the paid-for packaged deals. Such accounts typically charge anywhere between £5 and £25 each month and include mobile phone insurance, breakdown cover and ID theft protection.

These products have a couple of problems. Firstly, many people don’t make use of – or even know about – all the benefits they pay for, leaving them out of pocket. And secondly, the thrown in perks are often not as comprehensive as standalone policies. Nightmare stories frequently circulate of packaged account mobile phone cover failing to pay out, thanks to ambiguous statements in the small print over ‘taking due care’.

Needless to say, if you ever rely on add-in insurance policies, be sure to read all the small print and pay close attention to any exemptions.

Work for your return

There is certainly some satisfaction in having a good old moan about the banks and their tricky pricing structures. But ultimately, the whole process boils down to one decision: do you want to use the bank, or are you content for the bank to use you?

Banking gimmicks should be condemned if they lead to mis-selling, illegality or excess confusion over financial products. But we shouldn’t let lazy consumers off the hook. It’s certainly not the fault of the bank if a saver doesn’t notice that their interest rate has tumbled by several percentage points. As with everything, if you want an easier experience, you’ll have to pay a premium.

And as for the new wave of ‘no strings attached’ banks, offering simple products but inferior rates: well, sometimes it seems that no-gimmick banking has become a gimmick in itself.

More on banking:

Your best bets for instant access savings

Why most pension savers lose

Ten ways to avoid Capital Gains Tax

Santander offers £50 incentive for taking out student current account