Stimulating Interest: Reminding Savers to Act When Rates Decrease

38 Pages Posted: 9 Mar 2017 Last revised: 5 Apr 2017

Paul Adams

Financial Conduct Authority

Stefan Hunt

Financial Conduct Authority

Laura Smart

Financial Conduct Authority

Redis Zaliauskas

Lloyds Banking Group

Date Written: January 24, 2015

Abstract

Consumers who take out savings accounts with high introductory interest rates do not always switch to a comparable account when the rate ends. This can result in lower returns in the long term, or at least for some period of time before the consumer takes action. Whilst there may be good reasons not to switch, one potential explanation is that these consumers are affected by behavioural biases, such as undervaluing long-term gains relative to short-term costs (present bias) or paying insufficient attention to their savings choices (limited attention). Such biases mean that consumers do not take action despite financial incentives and a desire to do so.

We carried out a trial in partnership with a large UK financial institution involving over 20,000 savings account customers whose interest rate was about to decrease or had just decreased. All of these customers had already received a letter two to three months before the rate decrease informing them of this. In this paper, we investigate the effects on switching behaviour of:

- an additional letter which reminded customers of the rate change (‘reminder’),
- different messages in the reminder designed to mitigate the effects of behavioural biases, and
-the timing of the reminder, and in particular, whether the reminder was sent before or after customers’ interest rate decrease.

Overall, our results show that reminders make a notable difference to switching behaviour in savings accounts around the time of interest rate decreases. The very fact of getting a reminder is more important than the precise phrasing of the reminder and can increase switching by at least 8% relative to not receiving a reminder. Specifically, switching increased by between 5.6 to 7.9 percentage points 20 weeks after the rate decrease, relative to a base switching rate of approximately 50% to 70%.

Customers who received a reminder in which the cash loss from not switching accounts was salient (i.e. ‘£X less interest per year’) or in which the cash gain was salient (i.e. ‘Move your savings and earn up to £X more’), among other changes, were slightly more likely to switch or transfer money than those who received a reminder without any particular emphasis.

We find that sending a reminder letter before the interest rate decrease increased switching by 7.1 percentage points compared with not sending a reminder. While switching to a comparable account within the firm decreased by 2.0 percentage points, moving money elsewhere – switching to a different firm or other behaviour – increased by 9.1 percentage points. In the context of other proposed remedies for the savings market, this change in behaviour is likely to have positive effects on competition, increasing pressure on firms to keep their rates high.

Sending a reminder after the rate decrease also led to more switching compared with not sending a reminder, but only by encouraging customers to open a new comparable account with the same firm. It had no detectable effect on switching or transferring elsewhere.

While customers over 60 years old or with balances above the median were more likely to switch in general, reminders increased the rate of switching across all customers including younger customers and those with lower balances.

JEL Classification: C93, D03, D04, D14, D18, D83, G18

Suggested Citation

Adams, Paul and Hunt, Stefan and Smart, Laura and Zaliauskas, Redis, Stimulating Interest: Reminding Savers to Act When Rates Decrease (January 24, 2015). FCA Occasional Paper No. 7. Available at SSRN: https://ssrn.com/abstract=2858186

Paul Adams (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Stefan Hunt

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Laura Smart

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Redis Zaliauskas

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

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