Are you being rewarded – or charged – by your bank?

When was the last time you changed banks?

This year? Last year? Five years ago? More?

According to anecdotal evidence, about one in two Australian banking customers are still with the first bank they ever joined. And from my experience in the agricultural industry, I’d hazard a guess that the figure is even higher.

This is a great statistic for banks. What bank wouldn’t want to promote that they have loyal and satisfied customers that have banked with them for life?

But are their customers really satisfied? Or is just easier to stay with the bank they know.

I get it. Switching between banks can be difficult and time-consuming. But if I told you that your bank is probably not rewarding you, would you think otherwise?

Competition between banks for new customers, especially as interest rates are rising, is fierce. But because the banks know most customers can’t be bothered changing, they focus on new business, rather than rewarding loyalty.

And as a loyal, long-term customer, you’re probably paying for it.

But before I explain further, let’s consider some pros and cons of staying with the same bank year after year.

Pros of bank loyalty

• You get to know the people you’re dealing with, at least in your local branch or area
• There’s usually minimal paperwork, even when you need to set up a new account or loan
• You understand how the bank’s systems, website, and mobile app work

Now, these all sound like pretty good reasons to stay with the same financial institution. After all, who has time to fill out paperwork or learn how to navigate a new app? And if you’re in a small town, perhaps the bank staff are your friends?

But there are also cons of loyalty, and like any business or financial decision, it’s always important to weigh up the pros and the cons. 

The cost of bank loyalty

• Other banks may have policies that fit better with your business, and you may be able to purchase that block of land even though your existing bank says no
• Business loans come in many different forms, there may be better options out there
• Other banks and financial institutions might actually have even better systems, processes and resources to make banking even easier

But here’s the biggest reason that staying loyal to one bank is not always a good idea.

You’re probably paying too much.

That’s right. As a long-term, loyal customer, you’re probably paying a higher interest rate than a person who took out their finance yesterday.

It’s called a loyalty tax.

A loyalty tax is when a financial institution offers new customers low interest rates while charging existing customers higher interest rates. Maybe they don’t feel they are at risk of losing you as a client. In the banking sector, it’s the gap between the pricing on new loans versus pricing on old loans.

A 2022 report from home loan mortgage broker Lendi, shows banks are making a huge profit because customers are reluctant to change banks. According to their analysis, new customers at the big banks receive mortgage rates 91 basis points lower than existing customers. It also appears that banks have passed recent interest rate rises on to existing customers, allowing banks to compete for new business with lower interest rates. The report suggested that on a $500,000 loan, a 91-point difference would cause the customer paying over $70,000 over the period of their loan, while the banks earn $4.5 billion extra every year.

Whilst this report specifically refers to home loans, it is possible and entirely probable that the same is happening with your business lending.

Based on those figures, surely it’s worth weighing up that extra cost against the inconvenience of changing to a new bank?  Or, at the very least challenging your existing bank by seeking other quotes from their competitors.

And that’s where your mortgage broker can help.

Case Study

A generational farmer was preparing to buy a neighbouring property. He was a lifelong client of his bank. Normally he’d have approached the bank himself, comfortable that his long-standing relationship with his bank would ensure he received the best rates possible. 

His financial advisor suggested he approach other banks to test the market. I was engaged by the client to manage a tender process for him, putting his loan out to a range of banks. 

We prepared a professional credit submission for the required $2,000,000 and presented to the market. It was an attractive proposition for the banks, which ensured strong competition. 

His current bank came back with rates 1% higher than the best offer we received, despite knowing they were quoting against other banks. It makes you wonder what the rate would have been if there were not competitors involved. 

This tested the client’s loyalty to the bank that he’d had a good relationship with for many years. He questioned his past dealings and was disappointed they hadn’t been competitive. 

Was he prepared to pay $20,000 more per year to stay with the bank he’d been loyal to all his life? The answer is no. We managed to negotiate a lower rate, that was comparable to the other offers and he stayed with his existing bank.

Most importantly he’s now aware of the value in a tender process for his banking business and has committed to regular reviews with us.

Over to you

When was the last time you reviewed your mortgage? Is it time to find out how much you could save? At a time of increasing interest rates and input costs, surely you owe it to yourself and your farm business to speak with a broker and put your bank – and your business debt to the test.

Like to know more?

Send me an email or call me on 0409 438 115.

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