Beware Of The Nasty 99s!

Financial firms use dozens of sneaky tricks to catch us out. Here's one of their firm favourites.

I came across some research last week which reminded me of the Roman saying "mundus vult decipi, ergo decipiatur" ("The world wants to be deceived, so let it be deceived.").

A press release from independent financial analyst Moneyfacts revealed some research into the behaviour of financial firms conducted by Dr John Ashton of the ESRC Centre for Competition Policy at the University of East Anglia and Dr Robert Hudson of Leeds University Business School. They discovered a phenomenon which they named "the Point 99 Syndrome", in recognition of the fact that companies often use numbers ending in .99, rather than rounding these up to the nearest whole number.

Of course, we're familiar with this trick in supermarkets, where very few items are sold at round-number prices. A fair proportion of shoppers will see an item on the shelves priced at £1.99 and, instead of rounding this up to £2, they unconsciously or otherwise believe that they are paying a price which is markedly less than £2, rather than merely a penny short.

Unsurprisingly, banks and building societies also manipulate their interest rates for mortgages and savings accounts in order to take advantage of the public's naivety and willingness to be duped. Indeed, because many -- perhaps the majority of -- consumers are unable to process numbers and prices effectively, banks and building societies have turned the .99 Syndrome into a nice little earner.

Drs Ashton and Hudson created a mathematical model that demonstrated which particular digits maximise profits for banks when customers round and truncate (shorten) interest rates in order to remember and recall numerical data. They found that an inconsistently high proportion of UK home loans end in .99, whereas whole numbers are used far more often for savings accounts.

The model predicted that lenders maximise their profits from mortgages by setting interest rates just below integers (whole numbers), for example, at 4.95% or 4.99% instead of 5% a year. For savings accounts, the highest profits came by setting interest rates at whole numbers, or at half- or quarter points, such as 4.5% or 4.75%.

The two academics reached their conclusions after studying Moneyfacts data over the twelve years from 1993 to 2004. Over this period, there was significant clustering at points just below integers, half-points and quarter-points in just under half of all mortgages.

For savings accounts, Drs Ashton and Hudson checked 1,294 deposit accounts from 176 financial firms. Well over three-quarters of all interest rates were set in a manner consistent with maximising profits from customers who tend to round figures up or down. What's more, "digit clustering" is much more common when setting interest rates for smaller deposits than for larger sums. Hence, this trick is most often aimed at people with modest amounts to save.

Naturally, consumers who are least able to process numerical information are most likely to be caught out by the .99 ruse. Hence, given that innumeracy is far more common amongst workers on low incomes than amongst high earners, banks and building societies gain the greatest profits by using the .99 Syndrome against the least financially sophisticated and most vulnerable members of our society. Shame on them!

As a former mathematician, I really enjoyed reading this report into "clustered pricing effects", which backs up one of the many rules that I created in my two decades in the financial sector. In layman's terms, I'd summarise its conclusions as follows:

"Banks and building societies try to pull the wool over your eyes by making their interest rates look as attractive as possible. Hence, make sure that you look beyond these headline rates and check for any pitfalls, traps and strings attached!"

So, always remember to look beyond that mouth-watering interest rate, because there's sure to be some nasties lurking in the small print!

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