Opinion: hidden cost of 'best buy' financial deals

Are savvy switchers profiting at the expense of the most vulnerable? Sarah Coles offers her view.

Shopping around is a no-brainer. Switch to the cheapest energy deal and you could save upwards of £300.

Rather than paying 20% interest on your credit card debt you could keep it interest-free for more than three years with a top balance transfer card.

It’s no wonder that savvy money-savers consider shopping around to be one of the basic fundamentals of managing their money.

However, there’s an argument that in the process of tracking down the best deals, they are profiting at the expense of the most vulnerable people in the UK.

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Someone must pay for cheap deals

This argument is based on the fact that, while the savvy few are shopping around, the vast majority of people are left languishing on terrible deals.

A study in 2015 by Professor Jonquil Lowe, a Lecturer in Personal Finance at the Open University, found that while 71% of people shopped around for car insurance, and 61% for home insurance.

Some 74% stick with an uncompetitive savings account, 75% with the same old credit card, and 78% with the same pay TV package.

Of course, money-savers would point out that it isn’t their fault that other people don’t look for deals - and they’d be right.

However, when you drill down into why people don’t shop around, it emerges that it isn’t necessarily their fault either.

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Why people don’t shop around

A UK Regulators Network study in 2014 looked into why people don’t switch providers.

A major barrier is that people don’t understand the market or the choices on offer.

As a result they are not aware of what they could save if they switched.

Lack of engagement plays its part, but this is far from the only reason.

The study found that people lack the skills to understand enough about the market and their own consumption patterns to make comparisons - this is particularly the case in complex markets.

Then there’s the fact that we lead such busy lives. Even when people have the skills, they may not have the time.

The Open University study found that the more services people used, the harder they found it to spare the time to shop around for them all.

The UKRN also highlighted that lack of access to the internet is a major barrier.

As we have reported before, according to the Office of National Statistics, 10% of people have never used the internet - that’s 5.3 million people.

Among this group we are most likely to find some of those on the lowest incomes, and older people.

Almost half of those who have never accessed the internet are aged 75 and over.

It means that many of those on lower incomes face the biggest barriers to shopping around.

These, of course, are the people who can least afford to be paying over the odds for everything from utilities to debt.

For these people, the market would work best if companies offered exactly the same deal to all their customers.

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Savvy shoppers to blame for poor deals?

An FCA report into shopping around concluded that: “Engaged and active consumers will incentivise firms to compete, allowing those firms that offer good deals to grow their market shares.” 

It means that companies will work hard to ensure they have a specific deal that is among the most competitive, in order to attract savvy shoppers.

The trouble is that these competitive deals are unlikely to make financial firms much money – and in some cases they actually cost them money - so they will look to make their profits elsewhere.

They do this by offering worse terms to those who don’t shop around, or who are less effective at managing their money.

Make sure your savings aren't languishing on a low rate: compare savings accounts

Why loyal savers lose out

This is usually done by making deals progressively less competitive.

For example, it’s why savings accounts often have a bonus for a year, pushing them to the top of the best-buy tables.

Once the year is over the rates fall to a paltry level, but many savers stay put.

According to the FCA only half of balances are moved out of such accounts even 12 months after the bonus rates expire.

It’s no wonder that in 2013, around £160 billion of easy access account savings earned an interest rate equal to or lower than 0.5%.

Make sure your savings aren't languishing on a low rate: compare savings accounts

Disparity in borrowing

As we referenced at the start, the average credit card APR has been edging upwards in recent years and now stands above 20% – despite Base Rate standing at 0.25%.

However, savvy borrowers (and those with the great credit ratings required to qualify for these deals) have been taking advantage of 0% new purchase and balance transfer credit cards for years.

I could go on to discuss many other products, but the trend is clear: less savvy consumers — who may not have the skills or practical tools to enable them to hunt down the best deals — are helping subsidise the best rates available to those who shop around.

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Savvy shoppers come in handy

However, before we rip up the rulebook and demand everyone stops comparing financial products, it’s worth being aware of the flip side of the argument too.

Perhaps it’s true that, without savvy shoppers, the same deal would be offered to everyone.

But you have to ask whether without anyone pushing them to lower prices, companies would have any incentive to make that universal deal a particularly good one.

It means that while savvy shoppers may be distorting the market, the answer is not for them to give up.

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What do you think? Are savvy shoppers benefitting at the expense of those less fortunate? Or is it merely a fair market where those putting in the effort can secure better deals? Let us know in the comments section below.

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