Credit interest cuts hit low earners
All banks have fallen on hard times in recent months, so it's no surprise that each of them has been busy cooking up new ways to recoup lost revenues. Mortgage fees have been rising, credit interest has been falling – all of which is understandable in the context of the worst banking crisis in living memory.
In the past, however, whenever the banks have been trying to squeeze their customers, it's always been a relief to watch the biggest building societies taking a more lenient line. As mutual companies – who don't have to answer to the demands of shareholders – they can plough their profits back into the business, sacrificing a slice of their margins in the interest of treating their customers fairly.
Nationwide, the UK's biggest building society, has always led the way – whether it's been campaigning against the introduction of cash machine charges, or giving its credit card customers the right to pay off their highest interest-bearing debt first.
So it was particularly disappointing to discover this week that the credit crunch seems to have persuaded Nationwide to part with its principles.
As of 1 August, customers of Nationwide's Flex current account, who earn between £1,000 and £1,500 a month, will see their credit interest rate cut from 3.5 to 2 per cent – a move which, in effect, allows Nationwide to cut their costs at the expense of their lowest earning customers. Furthermore, customers of Nationwide's Cash Card accounts – who earn more than £1,000 a month – will see their interest almost completely wiped out, as the rate comes down from 3.5 to just 0.1 per cent.
I should say that I've never been a massive advocate of current account interest. It's always struck me that the average person will probably see most of their salary eaten up by their rent or mortgage at the start of the month, meaning there's never much left in their account to earn interest on anyway. But for some people, the extra few pounds a month is something they value – and in the case of Nationwide, it may perhaps be the reason they chose to open account with them in the first place.
Although Nationwide nonchalantly claims that the changes to its accounts will only cost most customers £1.25 a month, for some it will be more – especially those who were only able to qualify for one of the bank's basic Cash Card accounts, where interest has now been all but abolished. I understand that banks have got to find a way of cutting costs during what are difficult times, but surely there are other customers they could take from.
For Nationwide, however, it all makes great commercial sense. The cost-savings will be twofold. Not only do they save on the interest that they have to pay to lower earning customers, but there's also a chance that they'll scare some of them away to another bank. Although it might sound counter-intuitive to drive away your customers, Nationwide knows that there's little value to be gleaned from low earners, as they're less likely to have any spare cash to spend on other Nationwide products.
Sadly, this is the way that most banks are thinking. A couple of years ago, First Direct started charging customers a fee of £10 a month if they paid less than £1,500 a month into their account – a move deliberately engineered to scare off unprofitable and poorer customers. But while you might expect such behaviour from a multi-national FTSE 100 company such as HSBC, which owns First Direct, I never thought I'd see Nationwide stooping so low.
Read the Spending Power blog at www.independent.co.uk/spendingpower
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